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AIG Bailout

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Last updated date: 17th Jul 2024
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AIG US: An Overview

American International Group Inc. is a multi-line insurance firm. The company provides a variety of life insurance, property and liability insurance, retirement programmes and other financial services to individuals and businesses. It provides products for general liability, directors and officers' liability, property, workers' compensation, maritime, aerospace, environmental, commercial, automotive liability, term life, universal life, fidelity, fiduciary liability, cyber risk, and errors and omissions insurance. 


Personal auto insurance, vacation insurance, political risk insurance, accident and health insurance, and individual and group retirement solutions are also available. The group offers and distributes its products through brokers, captive and independent agents, affinity partners, retailers, airlines, and travel agencies, among others. AIG US does business across the Americas, Europe, Africa, the Middle East and Asia-Pacific.


Information on the 2008 AIG Bailout: AIG Reports

On September 16, 2008, the Federal Reserve provided AIG with an $85 billion two-year loan to save the company from going bankrupt and putting an additional burden on the global economy. In exchange, the Fed purchased 79.9% of AIG's equity. As a result, it had the authority to alter the management, which it did. It also had the power to veto any key decisions, such as the sale of assets or the distribution of dividends.


The Wall Street bailout occurred exactly one day after US Treasury Secretary Henry Paulson promised no future bailouts would be made. That action put Lehman Brothers, an investment bank, into bankruptcy.


What Caused AIG to Fail?

The corporation's use of credit default swaps, which cost AIG $30 billion, is generally seen as having a substantial role in the collapse. They were not, however, the only perpetrators. The authors concluded that securities lending, a less-discussed element of the company, cost AIG $21 billion and is mostly to blame.


McDonald and Paulson also investigated AIG's assurance that the underlying mortgage-backed securities in its transactions would not default. According to McDonald, "after the crisis, there was a claim that these assets had been money-good, or safe investments that may have had a short-term drop but were secure overall. I was quite interested to find out if that was true."


AIG Bailout


AIG Bailout


Case Study

How did AIG announce the greatest corporate loss in history?

On March 2, 2009, AIG announced its greatest loss in corporate history. It lost over $62 billion in the final three months of 2008. As a result of AIG's loss, the Dow fell nearly 300 points to close at 6,763.29. That was the lowest close since April 25, 1997, when it finished at 6,738.87. It was also lower than the previous recession's low of 7,197 in October 2002. Since October 9, 2007, when it reached an all-time high of 14,164 points, the Dow has lost more than half its value.


Furthermore, the lack of scale in President Obama's economic stimulus package scared investors. Citigroup requested the third round of government negotiations.


Conclusion

The AIG bailout was not without controversy. Some questioned the government's use of public cash to purchase a failing insurance firm. The use of government monies to reward AIG executives sparked particular outrage. Others, on the other hand, argued that because of the interest paid on the loans, taxpayers benefited from the bailout in the long term. The sale yielded $22.7 billion in stated interest income for the government.

FAQs on AIG Bailout

1. How did a normal, extremely secure insurance company receive one of the largest bailouts during the 2008 financial crisis? 

AIG had become a large supplier of credit default swaps to boost its profit margin. These swaps covered the assets that backed corporate debt and mortgages. Many financial institutions that had purchased these swaps would fail due to AIG's failure.


AIG was so large that its failure would have a global economic impact. For example, the money-market fund industry purchased AIG debt and securities. Most mutual funds held AIG stock. AIG's major debt holders included financial institutions from all around the world.

2. What was the change inaction of the Federal Government with AIG?

On September 29, 2017, the Financial Stability Oversight Council voted to delist AIG as a "too large to fail" corporation. The Dodd-Frank Wall Street Reform and Consumer Protection Act established the Council to monitor financial institutions that impact the whole sector.


One factor is that AIG has been more committed to working with regulators to reduce risk. Another aspect was the company's reduction in size by half since 2007. AIG must return to its conventional insurance roots. It emphasised property and casualty insurance. It provides annuities and life insurance in addition to home and auto insurance. AIG's operating expenses were reduced as a result of the decision. It didn't have as many rules and limits.

3. Highlight the background of AIG US.

AIG is one of the world's largest insurers. Most of its sales are in general life, vehicle, home, business, travel insurance and retirement products like fixed and variable annuities.


It ran into troubles when it pushed outside of the conventional insurance business. The Financial Services division expanded into capital markets, consumer lending, equipment and aircraft leasing, and insurance premium financing. Asset management activities provided broker-dealer services, institutional spread-based investment activity and institutional asset management. The financial crisis reduced AIG's employment from 116,000 in 2008 to 56,400 in 2016. It simplifies and sells assets to reduce expenses and return to profitability.