According the the New York Times, Alan Frost, a Managing Director at AIG's Financial Products unit, negotiated scores of mortgage deals around Wall Street. Unfortunately he was doing that most basic of no-no's in the insurance industry and selling to antiselected buyers.

Al probably did not know it, but he was working with the bears of Goldman, a former Goldman salesman, who requested anonymity so he would not jeopardize his business relationships, said of Mr. Frost. He was signing A.I.G. up to insure trades made by people with really very negative views of the housing market.

As insurance companies well know, the most sophisticated mathematical modeling available goes straight out of the window if the buyer knows something that the model doesn't take into account.

To combat this problem, all forms of insurance: property, health, life etc, take the possibility of such a buyer into account. Despite employing armies of actuaries to calculate the risks and appropriate pricing for each of their products, they also never take a significant risk onto their books without having it evaluated by an experienced underwriter.

Underwriters are a different breed. The antithesis of the mathematicians and operations experts in the rest of the insurance organization, underwriters are really just experienced observers of human nature. Tending more towards EQ than IQ, they understand the tendency of people to be less than truthful about their reasons for wanting insurance, or about disclosing lifestyle issues that may incur an additional premium or even render them ineligible for insurance at all.

An underwriter who had been around Wall St for any length of time, say as a back office operations manager who had experience with the kind of dodgy deals that traders try to push through from time to time, would easily have been able to see what Messrs Egol and Sundaram were up to. That is: antiselectively buying insurance, not to protect themselves, but as an active part of their strategy to make a profit.