Behind AIG's Fall Case Study Example | Topics and Well Written Essays - 500 words

Behind AIG's Fall - Case Study Example This collapse also triggered skepticism about use of computer driven models. Warren Buffet had warned earlier about the potential risk involved with using such models. AIG either misled its investors or was really in the dark about the potential risk when in during a meeting last December, it assured the investors that this model gave AIG "a very high level of comfort." The problem with the model was that while it took historical data into account to assess potential of default, it would not consider the risk of future collateral calls or write-downs, which has destroyed AIG. The firm also suffered because it had not protected itself through hedging which resulted in exposure to very large collateral calls. AIG has already paid around $8 billion to $9 billion to Goldman Sachs Group in collateral because it was one of the trading partners. Such payments will continue even after the bailout. Gorton had always been passionate about mathematics and joined AIG in 1990. He was paid $250 per hour or around $200,000 a year for his model. He would collect data to assess and forecast losses of various assets including home loans and corporate bonds. AIG came to depend on his models excessively. Since Mr. Gorton never considered write downs or collateral payments to partners, his plan was faulty. He was only focusing on covering actual default.