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AIG: Now that you own it, learn about it!

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First of all—what is AIG?

AIG is American International Group, the largest insurance company in the world. It's not just an insurance company, however; its business is divided into four divisions: general insurance, life insurance and retirement services, financial services, and asset management. It was started in 1919 in Shanghai.

How did it (almost) collapse?

Like many other banks, AIG lost a lot on its mortgages, including $18.5 billion in the past three quarters—all part of the subprime collapse. Its share price has dropped 79% this year. But bad became worse this Monday when AIG received a downgrading of its credit rating. What's a credit rating? All securities are given a rating that tells you how much risk is associated with your investment into that security. Depending on the rating, the company must have a certain percentage of money on hand. The ratings, given by agencies like S&P and Moody's, are a lot like school grades "“ A's are good (need less money on hand), B's are okay/bad (need more money on hand), and C's are junk (need even more money on hand). So S&P & Moody's downgraded AIG, which meant it needed to post $14.5 billion in collateral to support its trading contracts. AIG couldn't sell its assets off quickly enough to get that money. Seeing its impending doom, AIG tried to rally the rest of the banks (JPMorgan & Goldman) to lend them the money.

That didn't work, so the Fed had to step in order to keep it from total collapse. The Fed has promised to lend up to $85 billion to AIG.

But I thought the Fed wasn't going to bail anyone out anymore.

Well, yes, that's what they said. And they definitely stuck to their word when they let Lehman slide to its demise this weekend. However, AIG is more than just an investment firm. It's such a huge insurer (the largest in the world in terms of assets), and was such a huge player in the Credit Default Swaps (CDS) market, selling off risk to other financial players around the globe. If it collapsed, it would have shaken the global financial world.

What are Credit Default Swaps?

Okay, say I invest $10M into a bond for General Motors, but I'm now afraid that GM may see financial trouble. Instead of just selling my bond off, I can enter into a sort of insurance policy with a big bank, say AIG. I pay AIG a small premium every quarter. If GM remains fine, then AIG does nothing. If GM does see financial trouble and I lose money on my bond, AIG will pay me what I lost on my bond. Likely, this will be a lot of money, relative to the small premiums I pay. Once this happens, the contract of the "swap" terminates. This is all fine and great, except for the fact that the CDS market isn't regulated—thus I could enter into a contract with a bank that doesn't have the resources to cover the loss of my GM bond. The CDS market totals $62 trillion, in which AIG plays a central role. Since just about every bank, insurer, and institutional money manager has some sort of exposure to CDS, they all have some sort of exposure to AIG. Hence, the necessary bailout.

How does the bailout work?

Well the Fed doesn't just hand over the money when they do these bailouts. It has promised a two-year loan for up to $85B. In return, it gets a 79.9% equity stake in the company in the form of warrants (a warrant is basically a call option issued by the corporation—allowing the Fed the option of buying common stock in AIG at a specific price) called equity participant notes. Interest on their loan is at Libor (the London Interbank Offered Rate—it's basically the London equivalent of the US Federal funds interest rate, and is often used as a benchmark for short-term lending) + 8.5 percentage points. That's about 12% (now), which is very high interest.

So AIG has to make good on the loan in the two-years either through general operations (not likely) or through sale of its various assets or branches of business. AIG has about $1.1 trillion worth of assets, and the Fed plans to sell them off in an orderly manner.

Why so much money?

Though AIG only needed $14.5 billion after the credit downgrade this week, the $85B loan was designed so AIG would be left with little debt and it could take on whatever the next few quarters has in store.

Does this matter to me?

Yes—now you own part of AIG! Well, kind of. That $85 billion is comprised of your tax dollars. Yep, your tax money is now going to protect bad investments. Investments that packaged up your debt into various securities, and sold it off to another party, who sold it off to another party, who sold it off all over the world.

However, since the Fed is LENDING the $85B to the corporation (unlike the Fannie & Freddie deal) the government could make some serious money off the high interest rate. That is if, by some sort of divine intervention, the market, and thus AIG, rebounds. The Fed is making it clear that the taxpayer will only see positive effects of the bailout.

But will the taxpayer be affected?

Who knows. It may be true "“ the Fed and the Treasury may make some money off AIG due to the high interest rate, but will I ever see that money? . It's certainly a good way to assuage the public's fears.

Will the bailout work?

It should. See, certain branches of AIG are doing just fine. Its aircraft leasing business, for example, is the second largest in the world and is estimated to bring in between $7 and $10 billion.

And who's to blame?

That's for next time.

Be sure to read more of what Diana learned today here.

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iStock // Ekaterina Minaeva
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Man Buys Two Metric Tons of LEGO Bricks; Sorts Them Via Machine Learning
May 21, 2017
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iStock // Ekaterina Minaeva

Jacques Mattheij made a small, but awesome, mistake. He went on eBay one evening and bid on a bunch of bulk LEGO brick auctions, then went to sleep. Upon waking, he discovered that he was the high bidder on many, and was now the proud owner of two tons of LEGO bricks. (This is about 4400 pounds.) He wrote, "[L]esson 1: if you win almost all bids you are bidding too high."

Mattheij had noticed that bulk, unsorted bricks sell for something like €10/kilogram, whereas sets are roughly €40/kg and rare parts go for up to €100/kg. Much of the value of the bricks is in their sorting. If he could reduce the entropy of these bins of unsorted bricks, he could make a tidy profit. While many people do this work by hand, the problem is enormous—just the kind of challenge for a computer. Mattheij writes:

There are 38000+ shapes and there are 100+ possible shades of color (you can roughly tell how old someone is by asking them what lego colors they remember from their youth).

In the following months, Mattheij built a proof-of-concept sorting system using, of course, LEGO. He broke the problem down into a series of sub-problems (including "feeding LEGO reliably from a hopper is surprisingly hard," one of those facts of nature that will stymie even the best system design). After tinkering with the prototype at length, he expanded the system to a surprisingly complex system of conveyer belts (powered by a home treadmill), various pieces of cabinetry, and "copious quantities of crazy glue."

Here's a video showing the current system running at low speed:

The key part of the system was running the bricks past a camera paired with a computer running a neural net-based image classifier. That allows the computer (when sufficiently trained on brick images) to recognize bricks and thus categorize them by color, shape, or other parameters. Remember that as bricks pass by, they can be in any orientation, can be dirty, can even be stuck to other pieces. So having a flexible software system is key to recognizing—in a fraction of a second—what a given brick is, in order to sort it out. When a match is found, a jet of compressed air pops the piece off the conveyer belt and into a waiting bin.

After much experimentation, Mattheij rewrote the software (several times in fact) to accomplish a variety of basic tasks. At its core, the system takes images from a webcam and feeds them to a neural network to do the classification. Of course, the neural net needs to be "trained" by showing it lots of images, and telling it what those images represent. Mattheij's breakthrough was allowing the machine to effectively train itself, with guidance: Running pieces through allows the system to take its own photos, make a guess, and build on that guess. As long as Mattheij corrects the incorrect guesses, he ends up with a decent (and self-reinforcing) corpus of training data. As the machine continues running, it can rack up more training, allowing it to recognize a broad variety of pieces on the fly.

Here's another video, focusing on how the pieces move on conveyer belts (running at slow speed so puny humans can follow). You can also see the air jets in action:

In an email interview, Mattheij told Mental Floss that the system currently sorts LEGO bricks into more than 50 categories. It can also be run in a color-sorting mode to bin the parts across 12 color groups. (Thus at present you'd likely do a two-pass sort on the bricks: once for shape, then a separate pass for color.) He continues to refine the system, with a focus on making its recognition abilities faster. At some point down the line, he plans to make the software portion open source. You're on your own as far as building conveyer belts, bins, and so forth.

Check out Mattheij's writeup in two parts for more information. It starts with an overview of the story, followed up with a deep dive on the software. He's also tweeting about the project (among other things). And if you look around a bit, you'll find bulk LEGO brick auctions online—it's definitely a thing!

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Name the Author Based on the Character
May 23, 2017
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