The Controversial Collapse and Bailout of American International Group

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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.

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