The Case For AIG’s Successful Bailout With $182 Billion

The Case For AIG’s Successful Bailout With $182 Billion

Anyone might be shocked that American International Group Inc., also known as AIG, is no longer viewed as a danger to the U.S. financial system. Nearly ten years after receiving a government bailout worth around $182 billion.

Introduction

A significant turning point in the recent financial crisis was the demise and verge of failure of the world’s largest insurance company, American International Group (AIG). AIG was a tycoon in the world of insurance sales for many years.

However, the firm was in danger of failing in September 2008. The crux of the problem was located in a London office, where a unit of the business known as AIG Financial Products (AIGFP) came dangerously close to bringing down a mainstay of American capitalism.

The AIGFP section offered investment loss insurance. Typical insurance could protect an investor from changes in interest rates or other occurrences that might have a negative impact on the investment. Before the financial crisis, AIG had nearly $1 trillion in assets and lost $99.2 billion. The Federal Reserve Bank  intervened on September 16 of that year with an $85 billion loan to salvage the failing business.

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More About AIG

With operations in more than 80 nations and jurisdictions, American International Group, Inc. (AIG) is an American global financial and insurance firm. AIG firms employed forty-nine thousand six hundred persons as of January 1, 2019. General Insurance, Life & Retirement, and a stand-alone subsidiary specializing in technology are the three main divisions through which the corporation does business.

Commercial, personal, domestic, and international field operations are all included in general insurance. Group retirement, individual retirement, life insurance, and institutional markets are all included in life & retirement. The Federal Reserve saved AIG $180 billion during the 2007–2008 financial crisis, and the Financial Crisis Inquiry Commission linked AIG’s failure to the widespread selling of unhedged insurance. In 2012, AIG paid the U.S. government $205 billion back.

Factors That Contributed To AIG’s Crisis

AIG became a significant supplier of credit defaults to increase its profit margin. These swaps covered the assets that underpinned corporate debt and mortgages. AIG’s failure would cause many financial institutions that had purchased these swaps to fail. AIG was so big that its failure would affect the whole world economy.

For instance, the money-market fund sector bought debt and securities from AIG. Most mutual funds held AIG shares. Major debt holders for AIG included financial institutions all over the world.

AIG was once prosperous, but its subprime mortgage swaps brought them dangerously close to failure. AIG had to raise millions of dollars in cash when the mortgages tethered to the swaps fell behind in payments. When investors learned about the predicament, they sold their shares, which made it much more challenging for AIG to pay for the swaps.

AIG’s assets were more than sufficient to pay for the swaps., but it was unable to sell them before the due date for the swaps. As a result, it didn’t have the money to pay for the swap insurance.

Details About The 2008 Liquidity Crisis And AIG Bailout

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The Federal Reserve gave AIG an $85 billion two-year loan on September 16, 2008, to save the company from going bankrupt and adding more strain on the world economy. In exchange, the Fed acquired 79.9% of the shares in AIG. It had the power to alter the management, and it did so. Additionally, it had the ability to veto any major choices, such as the sale of assets or the distribution of dividends.

According to Treasury Secretary Henry Paulson, the bailout took place precisely a day after the U.S. There won’t be any more Wall Street bailouts. Lehman Brothers, an investment bank, was bankrupted by that action.

It happened a week after the government took over Freddie Mac and Fannie Mae. The Fed had bailed out Bear Stearns six months prior. Later that week, Bernanke and Paulson requested a $700 billion bailout from Congress to save all other banks. Edward Liddy was appointed CEO and Chairman of the Fed in October 2008. He was tasked with dismantling AIG and selling the components to pay the debt.

Liddy had to unwind credit default swaps worth billions of dollars securely. He spent $62 billion on borrowing from the Fed. The Federal Reserve Bank of New York gave its approval on October 8, 2008 to provide AIG subsidiaries with a $37.8 billion loan in return for fixed-income securities. 9 The Fed reorganized its help program on November 10, 2008. From $85 billion to $60 billion, it cut its loan.

Maiden Lane II and Maiden Lane were two new limited liability companies. In return for mortgage-backed securities, the FRBNY provided Maiden Lane II with a loan of $20.5 billion. It provided Maiden Lane III with a $29.3 billion loan in return for CDOs. It was paid back, and the $37.8 billion debt was canceled. III At the same time, the Treasury Department spent $40 billion from the Troubled Asset Relief Program to buy AIG preferred shares. With the money’s help, AIG could reasonably retire its credit default swaps, avoid bankruptcy, and save the government’s initial investment. The Treasury gave AIG an additional $29.84 billion in April 2009. Due to these adjustments, the rescue package’s overall cost increased to $182 billion.

Conclusion

When AIG ventured outside the realm of traditional insurance, problems ensued. The Financial Services section also entered the capital markets, consumer finance, leasing of equipment and aircraft, and financing of insurance premiums. In addition, the asset management activities supplied broker-dealer services, institutional spread-based investing activity, and institutional asset management. The crisis caused AIG’s workforce to decrease from 116,000 in 2008 to 56,400 in 2016. 2526 It simplifies and sells assets to minimize expenses and return profitability.