Risk held at AIGFP was not a surprise

Gillian Tett is going way out of her way to avoid admitting that she (or any financial journalist, really) could have and should have known that AIG Financial Products was holding a substantial portion of the risk in the credit derivatives market. In today's FT, she argues that the opacity of the CDS market prevented anyone from knowing about the huge risk concentration at AIGFP in advance. I won't deny that the CDS market is opaque and that more transparency is needed, but the risk concentration at AIGFP was neither a secret nor a surprise—and it certainly shouldn't have been a surprise to a financial journalist who is supposedly an expert on the credit derivatives market. The "hoocoodanode?" card won't play on this one.

Tett cites a Fitch survey of the CDS market from 2007 to make her point about AIGFP:

[W]hat is ... striking is that a well-respected Fitch survey before the collapse of the credit bubble suggested that AIG was just the 20th largest credit default swap player in the sector, based on gross notional outstanding volumes. No wonder those billions of lossmaking contracts subsequently came as such a shock.

Tett is being very disingenuous here. First, not until a few paragraphs later does Tett admit that the 2007 Fitch survey was ranking counterparties by gross notional rather than net notional amounts. The Fitch survey wasn't wrong—AIG was only the 20th largest counterparty in the CDS market by gross notional amount. What's wrong is to suggest that a ranking of counterparties by gross notional amount is the same as a ranking of "the largest players in the CDS market."

More importantly, though, what Tett conveniently fails to mention is that this very same Fitch survey clearly explained that AIGFP was the 800-pound gorilla in the credit derivatives market, and that by the end of 2006, AIGFP had sold a net total of $384 billion in CDS protection. From the 2007 Fitch survey (emphasis mine):

Global Insurance

The global insurance/reinsurance sector, representing principally AIG Financial Products, remained a large seller of protection, registering an aggregate gross sold position of USD503bn. On a net basis, the sector stood at USD395bn sold, up slightly from the USD383bn tallied at year-end 2005. Structured finance synthetic CDOs and corporate synthetic CDOs accounted for 93% of the sold volume. In terms of quality, of the total gross amount sold, 93% was in the super-‘AAA’ segment, versus 91% reported in last year’s survey.


In addition, 68% of the tenor sold ranged from one year to four years (compared with 44% at year-end 2005) though that was driven by AIG’s dominant “footprint” in this market. Excluding AIG Financial Products’ sizeable position, the global insurance industry had a net position of only USD11bn (USD21bn gross sold), down from the USD15bn (USD29bn gross sold) compiled at year-end 2005. Some of the decline can be attributed to a smaller sample than in the previous year.


By product on a sold basis, single-name CDS consisted of 63% of the volume, while corporate synthetic CDOs and structured finance synthetic CDOs made up just 16% of the total. Similarly, the credit profile, excluding AIG, of the industry changed, with ‘BBB’ representing 40%, ‘A’ at 35%, and ‘AA’ at 10%, while speculative grade represented 8%, and ‘AAA’ 6% of the notional amount sold.

The Fitch survey—which is publicly available (with a free Fitch account)—was published in July 2007, and was very well known in the markets. If you're a financial journalist covering the credit derivatives market, there's no excuse for not knowing about AIGFP until September 2008.