AIG debuts exciting new variety of world-ending financial products!
According to Barry Ritholtz, AIG has begun offering insurance against reputational damages. This is, to be sure, kind of a neat idea! The whole idea of being able to claim intangibles on your balance naturally suggests this kind of thing. If your reputation can be monetized, then reputational risk becomes a risk not just to your business, but to your solvency. Now, it’s pretty easy to imagine this going horrifically wrong. For example, imagine the big banks taking out reputational insurance right before something like a financial crisis that trashes all of their reputation at once. At least for the banks, most likely their reputations move with extremely high correlations…meaning AIG would probably have to pay all of their claims at once.
Now, the really exciting thing comes when you start offering derivatives on these insurance products. Just imagine the wonderful systemic risk potential posed by financial products grounded in no actual financial assets whatsoever. What a wonderful world we live in.
I am certainly no writer, but at one point after I learned about intangible asset accounting I attempted to write a satirical short story based on reputation-based financial products. Reputation valuation leads to reputation insurance…which, as a steady income stream can easily be securitized! Then of course you can write CDS’s against the securities…and so on. It would be the most bizarre financial crisis ever. I guess truth is stranger than fiction.