INTRODUCTION
The collapse and bailout of American International Group (AIG) that happened in 2007-2008 was one of the controversial crises in U.S. financial history. AIG is basically an insurance provider and sometimes reinsures firms that have taken too much risk. The cause of the downfall began after AIG’s financial products unit (AIGFP) ventured into the sale of Credit default swap. A credit default swap mimicked insurance policies but covered securities. The buyer makes regular payments to seller and the seller pays the face value of the loan in a case of default. Investors could hedge mortgages with CDS and that increased demand for sub-prime mortgages. Other causes of AIG downfall includes reliance on rating that built faulty trust in the market, housing bubble hurt subprime mortgages, lax insurance regulators and absence of oversight structure for non-insurance activities. The debt securities consisting of credit swap pool range from residential mortgages to automobile loans and ratings from professional rating agencies will make easier to sell credit swaps to investors (Vasudev 760). Credit raters such as Moody’s and Standard and Poor’s were quick give to assign triple AAA rating to all sorts of financial derivatives without understanding the risk involved (Serwer and Sloan). Credit defaults swaps are not considered insurance and insurance regulators forbid the writing of credit swaps (Harrington 790). OTS was a federal regulation unit charged to supervise companies like AIG from taking too much risk. Federal Office of Thrift Supervision acknowledged their inability to regulate a complex unit like AIGFP. The crises that ensued AIG began under the leadership of Hank Maurice Greenberg as the CEO.
AIGFP was created in 1987...
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...with investors could calculate the risk involved in credit default swaps and cancel their deals with AIG. CDS were insurance against defaults on financial instruments and times of non-payment by issuers AIG was supposed to pay collateral to the holders of these instruments and since AIG did not have such liquidity available to meet such requirement it relied on a bailout from the federal government. Cassano once again lied to investors about AIGFP not losing even a dollar in its CDS transactions. He was right. AIG didn’t lose a dollar but several billions of dollars.
CONSEQUENCES TO IMPORTANT STAKEHOLDERS
The insurance giant, AIG suffered tremendously from the credit swap business of it financial product unit. AIG shift from its core insurance business to a new line of business of business without a clear understanding of the financial derivatives and its risks.
The Savings and Loans Crisis of the 1980’s and early 90’s created the greatest banking collapse since the Great Depression in 1929. Over half the S & L’s failed, along with the FSLIC fund that was created to insure their deposits.
In the documentary HIH : The Inside Story Of Australia's Biggest Corporate Collapse (Westfield, M. 2003), the story of HIH Insurance’s collapse was aptly described as being due to the management’s gross mismanagement, largely charging too little for premiums and failing to put away enough to pay out claims. The HIH leadership concealed financial losses by under-reserving (which boosts profits) and using "financial reinsurance" contracts to turn losses into gains. Williams, the chief executive, distracted the investment community with a string of takeovers, culminating in paying $300 million for Rodney Adler's FAI Insurances in 1998.
Shao, Maria. The U.S. Auto Bailout was Necessary, argues Rattner. N.p.: Stanford Business, 2011. Print.
After the time of financial crisis, JP Morgan was not the only national bank in US which got involved in trade of toxic loans related to mortgage. Before JP Morgan, it was Goldman Sachs-another large US Bank that faced the allegation of manipulating the trades in its own self interes, ended up in favor of SEC while GoldMan Sachs were asked to pay $500 Million during late 2011 in a deal called Abascus 2007-AC1 where the bank were alleged to mislead its investors on a deal related to Collateral Debt Obligation(CDO). (Eaglesham, 2011) The ab...
Jake Clawson Ethical Communication Assignment 2/13/2014. JPMorgan Chase, Bailouts, and Ethics “Too big to fail” is a theory that suggests some financial institutions are so large and so powerful that their failure would be disastrous to the local and global economy, and therefore must be assisted by the government when struggles arise. Supporters of this idea argue that there are some institutions that are so important that they should be the recipients of beneficial financial and economic policies from government. On the other hand, opponents express that one of the main problems that may arise is moral hazard, where a firm that receives gains from these advantageous policies will seek to profit by it, purposely taking positions that are high-risk, high-return, because they are able to leverage these risks based on their given policy. Critics see the theory as counter-productive, and that banks and financial institutions should be left to fail if their risk management is not effective.
In Karen Hos’ Liquidated, she aims to study the relationships between corporate America and the worlds greatest financial center. . . Wall Street. She puts all her three years of research in her ethnography and thus the very first page of chapter one, we can already understand Hos’ determination to understand what Wall Street is all about. The first main theme explained is the relations in Wall Street that are based on a culture of domination of staff members, their irresponsibility dealing with corporate America, and constant changes that occur during this process. Another major theme we see in her ethnography is that Wall Street, first used for the communities wellbeing, is now profit oriented.
In the midst of the current economic downturn, dubbed the “Great Recession”, it is natural to look for one, singular entity or person to blame. Managers of large banks, professional investors and federal regulators have all been named as potential creators of the recession, with varying degrees of guilt. No matter who is to blame, the fallout from the mistakes that were made that led to the current crisis is clear. According to the Bureau of Labor Statistics, the current unemployment rate is 9.7%, with 9.3 million Americans out of work (Bureau of Labor Statistics). Compared to a normal economic rate of two or three percent, it is clear that the decisions of one group of people have had a profound affect on the lives of millions of Americans. The real blame for this crisis rests on the heads of the managers that attempted to play the financial system through securitization, and forced the American government to “bail out” their companies with taxpayer money. These managers, specifically the managers of AIG and Citigroup, should be subject to extreme pay caps for the length of time that the American taxpayer holds majority holdings in their companies, as a punitive punishment for causing the Great Recession.
There were many factors that triggered the financial crisis in 2008, with one of the main ca...
The Sub-Prime Mortgage Crisis of 2008 has been the largest financial crisis to take place since the end of the Great Depression. It was the actions of individuals and companies that caused this crisis. For although it could have been adverted, too much money was being made by too many people in place of authority to think deeply on the situation. As such, by the time actions were taken to attempt to rectify the situation, it was already too late. Trillions of dollar of tax payers’ money was spent trying to repair the situation that was caused by the breakdown of ethics and accountability in the private sector. And despite the government’s actions to attempt to contain the crisis, hundreds of thousands lives were negatively affected before, during, and after this crisis.
Investment banks, Rating agencies and Insurance companies are key components of the financial market. In this presentation, I’m going to explain how these three key roles worked together to create the 2008 financial crisis.
...lume basis. At Lehman Brothers, their own risk management department were constantly raising red flags which management overruled in order to seek more revenue. On December 12th 2013, The US Securities and Exchange Commission fined Merrill Lynch just over $130million for making false disclosures over 3 CDOs and holding inaccurate books. The banks believed the CDO machine couldn’t fail; they believed once they have sold on the toxic mortgages, it was no longer their problem. However, once the housing bubble burst, investors began to question the value of MBSs; there was a huge write down in their value, prompting huge losses in the financial sector. The long held myth that house prices do not decrease was found to be catastrophically inaccurate, and with the collapse of Lehman Brothers in September 2008, The Era of The Great Complacence was well and truly at its end.
... middle of paper ... ... The forced liquidation of some $3 trillion in private label structured assets has been deprived from the financial markets and the U.S. economy has obtained a vast amount of liquidity that the banking system simply cannot restore. It is not as easy to just assign blame within these cases, however it is noted that the credit rating agencies unethical decisions practices helped add onto the financial crisis of 2008 and took into account the company’s well-being before any other stakeholders.
In November 2007, the housing market in the United States started to take a downward turn. With loan defaults on the rise, the loans on Citigroup’s books were overdue for a revaluation. Due to the housing market decline and consumer spending cuts, Citigroup announced they expected to post a loss of between 6 and 11 million dollars. Citigroup’s stock plummeted. (Reference)
IMF Surveillance. (2013) IMF Surveillance [online]. International Monetary Fund. Available from: http://www.imf.org/external/np/exr/facts/surv.htm [Accessed 10 November 2013].
The IMF was not designed to be an aid agency but its role in economic