Book Review: Fatal Risk

When I came to work at Provident Mutual, I gained a friend who reported to me.  Roy was a real character.  He had his rules for life, and they all made sense to some degree.  When he opined on why we did business the way we did in the pension division, he would say,”We’re the good guys.  We are out to save the world for 0.25% on assets plus postage and handling.”

I like working with the good guys; that is my style, if I can achieve it.  Too many are purely out for personal enrichment, leaving aside the harm/good they do to others.

Roddy Boyd is one of the good guys.  If you haven’t read his stuff before in the papers/magazines in which he has written, you will benefit from his book on AIG.

This book has some real insight to it.  It focuses on the years where AIG stopped being a mere insurer, and started being a player in the capital markets.

That said, it contains new data on M. R. Greenberg, especially regarding his war years.  I found it very insightful, and helped me understand why he was the boss that he was. (I worked at AIG 1989-1992.)  He was one tough man in both war and business.

Boyd interviewed as many as would talk with him, and excluded material that would not be confirmed by two parties.  I felt that was an ethical way to deal with information not yet publicly known.

The driving force behind AIG’s push into financial services was a need for income uncorrelated with the P&C insurance cycle.  That also led to derivatives, commodities trading, airplane leasing, and expansion of the domestic life business, by purchasing SunAmerica and American General (both mistakes via overpayment in my opinion, and I know this business).

This expansion took a toll on AIG and as it could not grow profitably organically anymore at a 15% rate, it began to borrow money, both explicitly and implicitly, so as to lever a falling ROA (return on assets) into a 15% ROE (return on equity).

Greenberg oversaw the expansion into financial services, though not the imprudent risk taking after he was kicked out.  He also managed the increase in debt and implicit debt — most of that occurred under his watch.  But those that followed him were nowhere near his equals.  They could not manage that which was unmanagable by lesser mortals.  Martin Sullivan should have broken up the company on day one; that was his failure.  No one but Greenberg could manage the monstrosity.  If he had remained there, I suspect the company would have blown up in 2010-2015, with him screaming all the way down.  I think it was a mercy to him that he got kicked out.

When everything blew apart, no one could grasp the whole picture.  Greenberg was gone.  AIG was undermanaged.  No one knew the whole story, and all of the correlations hinging on subprime lending: direct lending through the consumer finance arm, investments in the insurance companies, guarantees through the mortgage insurance subsidiaries , securities lending collateralized by subprime in the domestic life companies, and guarantees at AIG Financial Products.

The effort at diversification ended up being an exercise in concentration.  Nothing grows to the sky.  Big firms tend to rot from within and that was the case for AIG, Greenberg or no.  I think Greenberg got sucked into the Wall Street earnings game, and it eventually got too big for him.  It was certainly too big for his successors.

This was a great book.  I loved every minute of reading it.  I could not put it down.  Roddy is one of the “good guys” and fights for what is right.  But he is fair; he does not take someone to task unless he has incontrovertible evidence.  Thus those who are suspected, but have no ironclad case against them walk, which is as it should be.

One more note, this book had a really good balance in how it would leave the main story to explain a concept, and the broader financial world.  It left the main focus on AIG, while explaining how it fit into the broader picture.


The book is not available yet.  I read an advance version, and there were some small errors that I expect will be eradicated when it goes to print.

Who would benefit from this book:

Anyone who wants to know more about AIG wold benefit.  This is the best AIG crisis book yet.  Beyond that, readers wanting to understand the complexity of the financial system, and how it led up to the crisis will benefit, as AIG was a microcosm of the greater panic.

If you want to, you can buy it here: Fatal Risk: A Cautionary Tale of AIG’s Corporate Suicide.

Full disclosure: This book was sent to me by the author, unsolicited.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.