AIG

By Rodrigo Quan Miranda

American International Group, Inc. (AIG) is an American insurance corporation, and one of the largest insurance corporations in the world, with a market value of $239 billion at its peak.[1] AIG’s current Chief Executive Officer (Also Chairman for the Board of Directors) is Edward M. Liddy.[2] AIG provides several insurance and financial services throughout the world, including auto insurance, life insurance, health insurance, retirement planning, and the most controversial at the time, Credit-Default Swaps (CDS).[3]
During the past few years, several investment banks and other financial institutions have been issuing Mortgage-Backed Securities (MBS) as ways to raise capital. But as MBSs were issued, these financial institutions realized that the risk of default (not paid back) on the MBS was too high for them to bear. They decided to insure their MBS with CDS offered by insurance companies as AIG. Basically, for a certain fee paid by the financial institution to AIG, a CDS promised that if the borrower defaulted on the MBS, AIG would cover for the costs of the defaulted MBS. Everything was going well, until the house market crashed. Because of this, a high percentage of the MBS were defaulted, and the entire burden of insured MBS was now borne by AIG (and other CDS issuers.) AIG realized they did not have the money to cover for all the CDS issued, its stocks crashed, and eventually, the U.S. government interceded.[4]
The government considered that AIG was too big to let it fall. Because of AIG’s extensiveness across the nation, the government thought that the impact it would cause on the U.S. economy would be devastating. On September 16th, the Federal Reserve bailed out AIG by extending an $85 billion credit line to prevent the company from going into bankruptcy. The credit line is to be paid in 24 months, and the idea behind it is that it will give AIG enough time and capital to improve its standing in an organized manner.[5] The government expects AIG to sell some of its healthy business branches in order to pay back the debt.[6] As part of the credit payment, the U.S. government will receive a %79.9 stake in the company, which basically means that the government will gain control over AIG.[7]
[1] Anonymous, “AIG’s rescue: Size Matters,” The Economist, September 20-26, 2008.
[2] AIG Corporate Information. “Corporate Governance: Board of Directors.” About AIG. http://ir.aigcorporate.com/phoenix.zhtml?c=76115&p=irol-govboard (accessed October 8, 2008).
[3] AIG, “AIG Home,” AIG web page, http://www.aig.com/Home-Page_20_17084.html (accessed October 8, 2008).
[4] Ted Hartsoe, “Financial Meltdown and the Economy,” Choate Economics Blog, entry posted October 02, 2008, http://choateeconomics.blogspot.com/html (accessed October 8, 2008).
[5] Anonymous, “AIG’s rescue: Size Matters,” The Economist, September 20-26, 2008.
[6] Anonymous, “Saving Wall Street: The Last Resort,” The Economist, September 20-26, 2008.
[7] Anonymous, “AIG’s rescue: Size Matters,” The Economist, September 20-26, 2008.