AIG Failures Essay

1085 Words 5 Pages
What was once the unthinkable occurred on September 16, 2008. On that date, the federal government gave the American Investment Group - better known as AIG (NYSE:AIG) - a bailout of $85 billion. In exchange, the U.S. government received nearly 80% of the firm's equity. For decades, AIG was the world's biggest insurer, a company known around the world for providing protection for individuals, companies and others. But in September, the company would have gone under if it were not for government assistance.

High Flying
The epicenter of the near-collapse of AIG was an office in London. A division of the company, entitled AIG Financial Products (AIGFP), nearly led to the downfall of a pillar of American capitalism. For years, the
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(Read _Credit Default Swaps: An Introduction_ to learn more about the derivative that took AIG down.)

One large chunk of the insured CDOs came in the form of bundled mortgages, with the lowest-rated tranches comprised of subprime loans. AIG believed that what it insured would never have to be covered. Or, if it did, it would be in insignificant amounts. But when foreclosures rose to incredibly high levels, AIG had to pay out on what it promised to cover. This, naturally, caused a huge hit to AIG's revenue streams. The AIGFP division ended up incurring about $25 billion in losses, causing a drastic hit to the parent company's stock price. (Read more about the lead-up to the credit crunch in _The Fuel That Fed The Subprime Meltdown_.)

Accounting problems within the division also caused losses. This, in turn, lowered AIG's credit rating, which caused the firm to post collateral for its bondholders, causing even more worries about the company's financial situation.

It was clear that AIG was in danger of insolvency. In order to prevent that, the federal government stepped in. But why was AIG saved by the government while other companies affected by the credit crunch weren't? (Read about one company that didn't survive financial crisis in _The Rise And Demise Of New Century Financial_.)

Too Big To Fail
Simply put, AIG was considered too big to fail. An incredible amount of institutional investors - mutual funds, pension funds and hedge funds - both

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