A(Drexel) I(Burnham) G(Lambert)

Investment bank Drexel Burnham Lambert lives on (in a very Drexel Burnham Lambert sort of way, actually,) in AIG's increasingly famous AIG Financial Products unit...

Michael ("Not Lewis") Lewitt, started his Op-Ed column in the NYTimes on Monday by recalling that day in February 1990 when Drexel, his shop at the time, folded.

"At the time, Drexel had $3.5 billion in assets and was the biggest underwriter of junk bonds..."

That was, of course, the last major investment bank to truly fold and file for bankruptcy protection (rather than get merged, rescued, bought out etc) prior to Lehman Bros.  He then pointed out, for colour, that at the time that Lehman folded, 

"Lehman owned more than $600 billion in assets. Financial institutions around the world have already reported more than half a trillion dollars of mortgage-related losses and that figure will most likely double or triple before the crisis exhausts itself."

Then on to the (still confusing) wonder that is AIG:

"But there is a bigger potential failure lurking: the American International Group, the insurance giant. It poses a much larger threat to the financial system than Lehman Brothers ever did because it plays an integral role in several key markets: credit derivatives, mortgages, corporate loans and hedge funds... There is (a) substantial possibility that A.I.G. will be unable to meet its obligations and be forced into liquidation. A side effect: Its collapse would be as close to an extinction-level event as the financial markets have seen since the Great Depression... A.I.G. does business with virtually every financial institution in the world. Most important, it is a central player in the unregulated, Brobdingnagian credit default swap market that is reported to be at least $60 trillion in size."

And so on to the FT this morning... 

"As American International Group fights for survival, the question on everyone’s lips is how could what was once the world’s biggest insurer get itself into such a mess? The answer has its roots in a decision in the late 1980s to hire a group of derivatives specialists from Drexel Burnham Lambert.  These formed the basis of AIG Financial Products, which wrote billions of dollars of derivatives, which are now at the heart of AIG’s woes and are a long way from the mainstream insurance business that continues to lie at AIG’s core."

(See article from 1990 here.)

Where will the ex-Drexel team go next, I wonder?  

Actually, they are now virtually employed by the Federal Reserve, aren't they...??!!!

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Maybe more circularity some time in the (not-too?) distant future??

• AIG (founded in Shanghai in 1919 by an American) - market cap, based on after-market trading price: USD700m
  
• China Life (HQ in Beijing) - market cap based on yesterday's ADR close: USD84,700m
  

Well, you never know what the Fed may eventually want to do with its stake...!

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