Jeffrey Wade
American International Group, Inc. (AIG) is an American multinational finance and insurance corporation with operations in over 80 countries. In 2008, AIG faced a financial crisis and was bailed out by the U.S. government to prevent its disorderly failure, which could have caused catastrophic damage to the financial system and the economy. AIG's near-failure was caused by its selling of credit default swaps and securities lending, resulting in significant losses. The bailout led to a lawsuit between AIG and Bank of America, with AIG seeking to recoup losses from insured banks. The two parties eventually settled, with Bank of America paying $650 million to AIG, which dismissed the litigation. Today, AIG is considered financially stable and continues to provide insurance and financial services worldwide.
| Characteristics | Values |
|---|---|
| AIG's bailout by the US government | 2008 |
| AIG's debt to American taxpayers paid off | 2013 |
| AIG's division that led to its near demise | AIG Financial Products |
| AIG Financial Products' bankruptcy | 2022 |
| AIG's loan from the Federal Reserve Bank of New York | $85 billion |
| AIG's total disbursement from the Federal Reserve and Treasury | $67.8 billion |
| AIG's lawsuit against | Federal Reserve Bank of New York |
| AIG's settlement with Bank of America | $650 million |
| AIG's sale of its Hartford Steam Boiler unit | $742 million |
| AIG's sale of its 21st Century Insurance subsidiary | $1.9 billion |
| AIG's sale of part of its asset management business | $500 million |
| AIG's sale of its majority ownership of Transatlantic Re | Not mentioned |
| AIG's total loss in 2008 | $99.2 billion |
| AIG's loss from credit default swaps | $30 billion |
| AIG's loss from securities lending | $21 billion |
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What You'll Learn
AIG's bailout by the US government
The American International Group Inc. (AIG), a global insurance business, was bailed out by the US government in 2008. The bailout was approved to prevent AIG's bankruptcy, which would have sent shockwaves through the already shaky money markets, causing millions of people to lose money in their investments. AIG was considered "too big to fail" as a large number of mutual funds, pension funds, and hedge funds had invested in the company or were insured by it.
AIG's financial crisis was caused by its Financial Products unit (AIGFP), which sold insurance against investment losses. In the late 1990s, AIGFP discovered a new way to make money through a financial product known as a collateralized debt obligation (CDO). CDOs bundle various types of debt, from very safe to very risky, and were popular among investment banks and other large institutions. However, many of the insured CDOs were bundled mortgages with the lowest-rated tranches made up of subprime loans. When foreclosures on home loans rose to high levels in 2007, AIG faced mounting losses from its subprime activities.
The US government's bailout package for AIG totalled approximately $182 billion, including $70 billion committed by the Treasury through the Troubled Assets Relief Program (TARP) and $112 billion committed by the Federal Reserve Bank of New York (FRBNY). The bailout allowed AIG to deliver additional collateral to its credit default swap trading partners and prevented the company's collapse.
AIG began selling assets to pay off its government loans in September 2008. The company also undertook a dramatic restructuring effort, cutting its size nearly in half and focusing on its core insurance operations. AIG repaid the last instalment of its debt to taxpayers in 2013, and the US government relinquished its stake in the company. Overall, the government made a positive return of $22.7 billion on its commitment to stabilize AIG.
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AIG's credit default swaps
The division's discovery of collateralized debt obligations (CDOs) in the late 1990s contributed to the issue. CDOs bundle various types of debt, from safe to risky, and were popular among investment banks due to AIG's strong credit rating. However, many of these CDOs contained subprime loans, leading to mounting losses for AIG when foreclosures on home loans surged in 2007.
AIG's CDSs were one-way bets, lacking offsetting positions to generate profits if the swaps lost money. The company's credit rating downgrade triggered collateral provisions, resulting in substantial debt obligations. Additionally, the interconnected nature of bond defaults heightened AIG's risk, as defaults by some bonds increased the likelihood of other bonds defaulting.
The federal government intervened to prevent AIG's insolvency, citing its "`too big to fail`" status, and the company received a bailout from U.S. taxpayers, which it fully repaid by 2013.
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AIG's securities lending
AIG, or the American International Group, is a multinational finance and insurance corporation with operations in over 80 countries. In 2008, AIG faced a financial crisis that almost led to its bankruptcy. The company's credit default swaps played a significant role in this collapse, resulting in losses of $30 billion. However, securities lending, a less prominent aspect of the business, also incurred significant losses of $21 billion.
Securities lending is a common financial transaction where one institution borrows securities from another and provides collateral, typically in the form of cash. AIG primarily lent securities held by its subsidiary life insurance companies, centralized through a non-insurance, securities lending-focused subsidiary. In the lead-up to September 2008, AIG's securities lending business witnessed substantial growth, surging from under $30 billion in 2007 to $88.4 billion in the third quarter of 2008.
Additionally, AIG's securities lending activities were exacerbated by the one-sided nature of the transactions. The company lacked offsetting positions that could generate profits if its swaps suffered losses. This meant that when the financial crisis hit, AIG was vulnerable to significant losses across its securities lending operations.
The fallout from AIG's securities lending practices had broader implications. The company's financial woes triggered a federal government bailout in 2008, as AIG was deemed "too big to fail." This bailout stirred controversy, with critics questioning the use of taxpayer money to rescue a struggling insurance company. However, the government ultimately profited from the deal, earning $22.7 billion in interest. AIG settled its litigation with a $650 million payout to the Bank of America in July 2014.
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AIG's collateralized debt obligations
AIG's Financial Products division, based in London, sold insurance against investment losses through credit default swaps (CDSs). AIGFP discovered that it could cash in on the CDO trend by insuring CDOs against default. The chances of having to pay out on this insurance seemed highly unlikely, and the insurance was backed by AIG's pristine credit rating.
However, many of the insured CDOs were bundled mortgages, with the lowest-rated tranches made up of subprime loans. When foreclosures on home loans rose to high levels in 2007, AIG had to pay out on its promises to cover these loans, and the AIGFP division incurred about $25 billion in losses. Accounting issues within the division worsened the losses. This lowered AIG's credit rating, forcing the firm to post collateral for its bondholders, which made its financial situation even more precarious.
AIG's credit default swaps did not call for collateral to be paid in full due to market changes. However, when AIG's credit rating was downgraded, those collateral provisions kicked in, and AIG suddenly owed its counterparties a great deal of money. On September 15, 2008, calls for collateral on its credit default swaps rose to $32 billion. AIG was already weakened by its losses, and this sudden demand for collateral left the company worse off.
AIG was considered too big to fail, and the federal government stepped in to prevent its insolvency. The U.S. government approved a bailout package, saving AIG from bankruptcy in September 2008 with a rescue plan that ballooned to about $152 billion.
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AIG's financial stability
American International Group, Inc. (AIG) is a leading global insurance organization that provides a wide range of property casualty insurance and other financial services. It is considered financially stable, with Fitch Ratings giving it an A+ rating in recognition of its multiyear efforts to improve its business mix and expense management. AIG's financial stability is further demonstrated by its ability to deliver outstanding results, reflecting significant progress towards its long-term strategic, operational, and financial objectives.
However, AIG has faced financial challenges in the past. In 2008, the company was bailed out by the U.S. government to prevent its insolvency, as it was deemed too big to fail. AIG's financial troubles were centred around its Financial Products division, which sold insurance against investment losses. This division discovered a new financial product known as a collateralized debt obligation (CDO) that became popular among investment banks. However, when the housing market collapsed in 2007, AIG faced significant losses as many of the insured CDOs were bundled mortgages with subprime loans.
To recover from its financial crisis, AIG began selling some assets to pay off its government loans in 2008. The company formed international life insurance subsidiaries, reduced its debt, and sold various business units to raise capital. Despite the challenges, AIG maintained its operations in over 80 countries and continued to serve a significant portion of the Fortune Global 500 and Forbes 2000 companies.
In recent years, AIG has demonstrated financial stability and a commitment to long-term growth. According to a 2020 report by the Government Accountability Office (GAO), AIG's financial position remains stable, with improvements noted in its life and retirement policyholder contract deposits and property/casualty companies. The report also highlighted AIG's progress in repaying government debt, although challenges remain in the declining property/casualty rates market.
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Frequently asked questions
AIG, or American International Group, Inc., is an American multinational finance and insurance corporation with operations in over 80 countries.
AIG filed a suit against the Federal Reserve Bank of New York in 2013 to maintain its right to sue Bank of America and other issuers of bad mortgage debt. The two parties settled in 2014, with Bank of America paying $650 million to AIG.
Yes, in 2008, AIG was on the brink of failure. The U.S. government stepped in with an $85 billion loan to prevent its collapse, as AIG's failure would have caused "worldwide chaos" and sent values plummeting.
