How Much Open Interest In Commodity Futures Is Backed By AIGFP?

(emphasis mine) [my comment]

AIG Financial Products

AIG Financial Products Corp.
(AIGFP) is a subsidiary of American International Group, based in London. AIGFP is considered a key company in the global financial crisis of 2008-2009.

1. History

Joseph Cassano and Howard Sosin helped start the group in 1987. AIGFP businesses specialize interest rate and currency swaps and, more broadly, the capital markets.

AIGFP focused principally on OTC derivatives markets and acted as principal in nearly all of its transactions involving capital markets offerings and corporate finance, investment and financial risk management products.
AIGFP played key roles in the acquisition of London City Airport and, in one of the largest private equity transactions announced in 2006, the management-led buyout of Kinder Morgan Inc.

AIGFP's commodity derivatives and commodity indices helped stimulate the development of this new asset class. AIGFP's sponsored a major study on the historical performance of commodity futures by professors Gary Gorton and K. Geert Rouwenhorst. AIGFP created a specialized credit business. AIGFP focused its business on structured products like CDO's. In 2003, it absorbed subsidiary, AIG Trading Group (AIG-TG) which dealt primarily in over the counter derivatives and created the Dow Jones-AIG Commodity Index (DJ-AIGCI) from their offices in Greenwich, CT. The DJ-AIGCI is a leading commodity benchmark composed of 19 futures contracts on physical commodities. As of the end of June 2007, there was an estimated $38 billion invested in financial products that track the DJ-AIGCI on a global basis.

From 1987 to 2004, AIGFP contributed over $5 billion to AIG's pre-tax income. During that period, AIG's market capitalization increased from $11 billion to $181 billion, and its stock price increased from $4.50 per share to $62.34 per share.

2. Crisis of 2008

AIGFP's trading in credit derivatives led to enormous losses. These losses at AIGFP division essentially bankrupted the entire AIG operation, and forced the United States government to bail out the insurer. Under CEO Edward Liddy, the decision was made to unwind AIG Financial Product's entire book of business. Gerry Pasciucco, a managing director at Morgan Stanley, who was not involved with AIG FP when it made its catastrophic bets, was selected to manage the unwinding of the portfolio in October 2008, after the company had effectively failed and been taken over by the Federal Reserve.

AIG Financial Products and it subsidiary Banque AIG have been key players in the development of commodities as an asset class and has been active in this space since 1991. AIG Financial Products provides clients with a full suite of commodity offerings, including OTC derivatives on both individual commodities and commodity indices, structured products, and bespoke commodity investment solutions. As the creator of a leading benchmark for commodities investing, the Dow Jones - AIG Commodity IndexSM, AIG Financial Products helped spearhead the rapid growth of commodity-based investment in recent years and as of the end of the third quarter of 2006, there was an estimated $30 billion tracking the DJ-AIGCI.

From the prospectus of DJ-AIGCI ETF:

ETFS Agriculture DJ-AIGCI

Investment objective

ETFS Agriculture DJ-AIGCISM (AIGA) is designed to track the DJ-AIG Agriculture Sub-IndexSM and pays a capitalised interest return which cumulates daily. The Sub-Index is an "excess return" index and the interest component combines to give a total return investment.

About the security

AIGA is a Transferable security that can be created or redeemed on demand (by market-makers). It trades on the Exchange just like an equity and its pricing and tracking operate similar to an Exchange Traded Fund.

AIGA is backed by matching Commodity Contracts purchased from AIG Financial Products Corp. (AIG-FP) whose payment obligations are guaranteed by American International Group, Inc (AIG) [who in their right mind would buy an AIGFP-backed commodity ETF?] and backed 100% by collateral held by the collateral manager BNY Mellon in a separate account and adjusted daily.

My reaction: The two biggest players in commodity indices wer e Goldman Sach and AIG's Financial Products. AIGFP is also apparently in the business of selling OTC commodity derivatives to whoever is foolish enough to buy them (it complements their business of insuring toxic debt). What recipe for disaster. Makes you wonder how much open interest in the commodity futures is backed by AIGFP (and therefore the American taxpayer)?

This entry was posted in Background_Info, Financial_Wizardry, Food_Crisis, Wall_Street_Meltdown. Bookmark the permalink.

3 Responses to How Much Open Interest In Commodity Futures Is Backed By AIGFP?

  1. stibot says:

    Wegelin bank to pull out of US

    Switzerland's oldest bank has lost faith in US system and is leaving US.

  2. Anonymous says:

    i believe etf securities have moved from AIG to UBS since UBS bought the commodities arm of AIG FP.

  3. Anonymous says:

    I just copied this from the link you provide,

    AIGA is backed by matching Commodity Contracts purchased
    from UBS AG whose payment obligations are backed by
    collateral covering 100% of the daily mark to market value
    of Commodity Contracts outstanding. Such collateral is held
    by the collateral manager BNY Mellon in a separate account.

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