What a Lame Bunch of (Counter)parties

The U.S. government earlier this week injected another $30 billion into American International Group as part of its ongoing bailout of the firm. As people many people have said, this is more a bailout of AIG's counterparties than AIG. I'm sure if you asked many of those counterparties why they were willing to buy so many credit-default swaps from AIG in the first place, they would tell you that AIG was triple-A, no one could have expected the credit crisis, and so on. I'm not buying it as a good excuse.

As Joe Norcera pointed out in a great column Saturday, AIG essentially sold its triple-A rating to others. But even before the credit crisis, how safe was that triple-A rating anyway? If the study I found is any indication, not very.

In 1989, Moody's rated 24 banks* Aaa, according to a study by Bankim Chadha and David Folkerts-Landau I found in Martin S. Feldstein's International Capital Flows. By 1996, just three banks retained that top rating. Just one -- Rabobank of the Netherlands -- had triple-A marks from all three agencies.

I actually heard a person I considered a fairly astute observer of the financial markets say a few weeks ago that one of the lessons of the current crisis is that counterparty risks actually exist. It seems to me, though, that in some ways, this data would suggest we already had proof that it did.

*Not a perfect substitute for AIG, but as large financial institutions close enough if you ask me.