Falling of AIG

1. CRISIS COMMUNICATION The Failure of A.I.G

2. NAME : HARSHITA KASAT
ROLL NO : 52
CLASS : TYBMS ( FINANCE)
NAME : YASH CHAVAN
ROLL NO : 20
CLASS : TYBMS ( FINANCE)
NAME : ATHARVA MORE
ROLL NO : 70
CLASS : TYBMS ( FINANCE)
NAME : ANMOL PATIL
ROLL NO :45
CLASS : TYBMS ( FINANCE)
NAME :DEVANK VARADKAR
ROLL NO :115
CLASS : TYBMS ( FINANCE)

3. AMERICAN INTERNATIONAL GROUP
American International Group, Inc. (AIG) is an American multinational finance and
insurance corporation with operations in more than 80 countries and jurisdictions. As of
January 1, 2019, AIG companies employed 49,600 people. The company operates through
three core businesses: General Insurance, Life & Retirement, and a standalone technology-
enabled subsidiary . General Insurance includes Commercial, Personal Insurance, U.S. and
International field operations. Life & Retirement includes Group Retirement, Individual
Retirement, Life, and Institutional Markets. AIG is a sponsor of the AIG Women's Open golf
tournament. AIG's corporate headquarters are in New York City and the company also has
offices around the world. AIG serves 87% of the Fortune Global 500 and 83% of the Forbes
2000.[9] AIG was ranked 60th on the 2018 Fortune 500 list . According to the 2016 Forbes
Global 2000 list, AIG is the 87th largest public company in the world . On December 31,
2017, AIG had $65.2 billion in shareholder equity.During the financial crisis of 2007–
2008, the Federal Reserve bailed the company out for $180 billion and assumed control,
with the Financial Crisis Inquiry Commission correlating AIG's failure with the mass sales of
unhedged insurance. AIG repaid $205 billion to the United States government in 2012.

4. HISTORY
In 1919, Cornelius Vander Starr stepped off a steamship in Shanghai determined to
make his mark in the world. Working from a two-room office, he established
American Asiatic Underwriters, an insurance agency to which we trace our roots.
Starr believed in making the world a better place and with other early company
pioneers, his organization grew across the world. Today, AIG is a global insurance
company with operations in more than 80 countries and jurisdictions. We provide
a range of insurance products to support our clients in business and in life,
including: general property/casualty, life insurance, and retirement and financial
services through our General Insurance, Life and Retirement and Investments
business units. What unites us across all of these products is our commitment to
helping our clients prepare for what’s next. Whether that’s helping cities and
communities to prepare for and recover from natural disasters or providing a
financially secure retirement for millions of Americans, we have the specialist
expertise to help clients better manage risk.

5. WHAT WENT WRONG AT AIG?
The collapse and near-failure of insurance giant American International Group (AIG) was a
major moment in the recent financial crisis. AIG, a global company with about $1 trillion in
assets prior to the crisis, lost $99.2 billion in 2008. On September 16 of that year, the Federal
Reserve Bank of New York stepped in with an $85 billion loan to keep the failing company
from going under. The company’s credit default swaps are generally cited as playing a
major role in the collapse, losing AIG $30 billion. But they were not the only culprit.
Securities lending, a less-discussed facet of the business, lost AIG $21 billion and
bears a large part of the blame, the authors concluded.
What’s more, McDonald and Paulson examined the assertion that the mortgage-
backed securities underlying AIG’s transactions would not default. “After the crisis,
there was a claim that these assets had been money-good,” meaning they were sound
investments that may have suffered a decline in the short term but were safe overall,
McDonald says. “I was deeply interested in learning whether that was true.” Their
analysis showed, in fact, that these assets ended up losing money in the long term—
meaning AIG executives’ assertions about the safety of these investments were
incorrect.

6. 1. Causes:How did a boring, ultra-safe insurance company become one of the largest bailouts in the 2008 financial crisis? AIG had become a major seller of credit
default swaps in an attempt to boost its profit margin. These swaps insured the assets that supported corporate debt and mortgages. If AIG went bankrupt, it would
trigger the bankruptcy of many of the financial institutions that had bought these swaps . AIG was so large that its demise would impact the entire global economy.
For example, the money-market fund industry invested in AIG debt and securities. Most mutual funds owned AIG stock. Financial institutions around the world
were also major holders of AIG's debt . AIG's swaps on subprime mortgages pushed the otherwise profitable company to the brink of bankruptcy. As the
mortgages tied to the swaps defaulted, AIG was forced to raise millions in capital. As stockholders got wind of the situation, they sold their shares, making it even
more difficult for AIG to cover the swaps . Even though AIG had more than enough assets to cover the swaps, it couldn't sell them before the swaps came due.
It left it without the cash to pay the swap insurance.
2. March 2, 2009: AIG Reported BiggestCorporateLoss in History: On March 2, 2009, AIG reported the largest loss in corporate history. It had lost nearly a record $62 billion in the
fourth quarter of 2008.
As a result of AIG's loss, the Dow fell almost 300 points to close at 6,763.29. That was the lowest close since April 25, 1997, when it closed
at 6,738.87.
It was also lower than in the previous recession, which was 7,197 in October 2002.
The Dow was down over 50 percent from its all-time high of 14,164
points, reached on October 9, 2007.
Also, investors were spooked that President Obama's economic stimulus package was not large enough. Citigroup requested
a third installment of government aid . Warren Buffet's Berkshire Hathaway posted its worst book loss in its history.
3. The Bonus Scandal: After reporting this loss and taking the bailout, AIG paid $165 million in bonuses to its executives. People were outraged. There were even death
threats issued against AIG CEO Edward Liddy.But these were not merit bonuses to reward the executives’ performance. They were retention bonuses. The AIG
employees were asked to stay and safely unwind the credit default swaps, whose markets had disappeared. These derivatives were so complicated that no one
else understood them. They were also time sensitive . It took the same level of sophistication to get out of the mess safely that it took to get into it. Letting these
swaps fall apart could have cost the U.S. government more than $165 million . Edward Liddy didn’t need monetary motivation to clean up the mess. The Fed hired
him for a salary of $1. He successfully supervised a difficult strategy that safely reduced many of the outstanding credit default swaps . This protected your
ownership in the company as a taxpayer. It also protected your retirement portfolio, since many mutual funds and even money market funds had invested in AIG's
swaps.
4. 2012: U.S. TreasurySold Last of AIG Stock, Making a Profit : In December 2012, the Treasury Department sold off the last of its remaining shares of AIG. In total, the government
and taxpayers made a $22.7 billion profit from the AIG bailout. That's because AIG was worth a lot more in 2012 than in 2008.
5. 2015: AIG PaidAlmost$1 Billion to Settle ShareholderSuit : AIG investors, led by the State of Michigan pension, accused the company of misleading shareholders about how risky
the credit default swaps were that it issued. AIG agreed to pay $960 million to investors who bought AIG shares between March 16, 2006 and September 16, 2008.
This was one of the largest class-action settlements from the 2008 financial

7. NOT “MONEY-GOOD”
Problems in both its securities lending business and its credit default business made AIG
doubly vulnerable—and meant it had a great deal of outstanding debts. Wherever
counterparties could extract themselves from existing business, or not roll over existing
agreements, they did: “Everyone wanted to unwind their position with [AIG],” McDonald says.
And because of that, the firm “simply had to supply billions of dollars they couldn’t easily
come up with.”
But lack of liquid assets, McDonald found, was not the only problem . McDonald and Paulson
elicited help from colleagues in the Federal Reserve system to tap a database that has
information about every underlying component in a packaged security—meaning each
individual mortgage in a mortgage-backed security—to determine how sound AIG’s
securities were. They concluded that the securities were not in fact as sound as AIG’s
executives had purported.
“The pure liquidity story says that if we’d simply loaned AIG the money and walked away,
everything would ultimately have been fine,” McDonald says. “The fact that these underlying
assets did end up suffering substantial losses, even though the [government rescue] did save
the day, suggests that this wasn’t just about liquidity.” The executives’ claim that the assets
were “money-good,” he says, can be soundly rejected.

8. FALLING GIANT: A CASE
STUDY OF AIG
You may be surprised to learn that the American International Group
Inc., better known as AIG (NYSE: AIG), is still alive and kicking, and is no
longer considered a threat to the financial stability of the United States.
Almost a decade after it was handed a government bailout worth about
$150 billion, the U.S. Financial Stability Oversight Council (FSOC) voted
to remove AIG from its list of institutions that are systemic risks, or in
headline terms, "too big to fail." In 2013, the company repaid the last
installment on its debt to taxpayers, and the U.S. government
relinquished its stake in AIG.
•The insurance giant was among many that gambled on collateralized
debt obligations and lost.
•AIG survived the financial crisis and repaid its massive debt to U.S.
taxpayers.

9. TOO BIG TO FAIL
Simply put, AIG was considered too big to fail. A huge number of mutual funds, pension funds, and hedge funds invested in AIG or were insured
by it, or both . In particular, investment banks that held CDOs insured by AIG were at risk of losing billions. For example, media reports indicated
that Goldman Sachs Group, Inc. (NYSE: GS) had $20 billion tied into various aspects of AIG's business, although the firm denied that figure .
Money market funds, generally seen as safe investments for the individual investor, were also at risk since many had invested in AIG bonds. If
AIG went down, it would send shockwaves through the already shaky money markets as millions lost money in investments that were supposed
to be safe.
However, customers of AIG's traditional business weren't at much risk. While the financial products section of the company was close
to collapse, the much smaller retail insurance arm was still very much in business. In any case, each state has a regulatory agency
that oversees insurance operations, and state governments have a guarantee clause that reimburses policyholders in cases of
insolvency . While policyholders were not in harm's way, others were. And those investors, who ranged from individuals who had
tucked their money away in a safe money market fund to giant hedge funds and pension funds with billions at stake, desperately
needed someone to intervene.
While AIG hung on by a thread, negotiations took place among company executives and federal officials. Once it was determined that the
company was too vital to the global economy to be allowed to collapse, a deal was struck to save the company. The Federal Reserve issued the
initial loan to AIG in exchange for 79.9% company's equity. The original amount was listed at $85 billion and was to be repaid with interest.Later,
the terms of the deal were reworked and the debt grew. The Federal Reserve and the Treasury Department poured even more money into AIG,
bringing the total up to $142 billion.

10. THE AFTERMATH
AIG's bailout did not come without controversy.
Some questioned whether it was appropriate for the government to use taxpayer money to purchase a
struggling insurance company. The use of public funds to pay out bonuses to AIG's officials in
particular caused outrage.
However, others noted that the bailout actually benefited taxpayers in the end due to the interest paid
on the loans. In fact, the government made a reported $22.7 billion in interest on the deal.