How AIG Destroyed Itself (Part I)

The roots of the current financial crisis can be traced back to a series of lunches and late-night dinners between two relatively unknown junk-bond traders 20 years ago. Howard Sosin and Randy Rackson had a plan to change the way the financial world did business, provided they could find a patron with a AAA credit rating to try it on. They found one in AIG, the Washington Post reports in the first part of an investigation into the insurer’s fall.

The pair formed AIG Financial Products and began making complicated derivative trades, each extensively hedged in a way they believed would preclude real risk. The strategy seemed wildly successful, which pushed the firm into ever more exotic territory in search of profit growth. When Sosin left after a tiff with CEO Hank Greenberg, the trades moved into riskier territory, putting AIG on the path to destruction. (More AIG stories.)