American International Group

American multinational insurance corporation

Serves more than 88 million customers in 130 countries
AIG companies employ over 64,000 people in 90 countries
AIG's corporate headquarters: New York City, USA
Europe, Middle East, and Africa (EMEA) headquarters London, England
Asian headquarters are in Hong Kong
In 1967, American International Group, Inc. (AIG) was incorporated as

a unifying umbrella organization .

The company went public in 1969.
In 1984, AIG listed its shares on the New York Stock Exchange (NYSE).
AIG serves 98% of the Fortune 500 companies, 96% of Fortune 1000,
and 90% of Fortune Global 500, and insures 40% of Forbes 400
Richest Americans
On March 31, 2015 AIG had a market capitalization of $75.04 billion

Products
The company operates through three businesses:
AIG Property Casualty
AIG Property Casualty provides insurance

products for commercial, institutional and

individual customers
AIG Life and Retirement
AIG Life and Retirement provides life insurance
and retirement services in the United States
United Guaranty Corporation
UGC focuses on mortgage guaranty insurance
and mortgage insurance

Share Price details

What went wrong with AIG

Inconsistency due to different valuation metrics
scheme to hide workers compensation
Change in management
deceptive accounting practices to understate claim

liabilities, misrepresenting underwriting profits, and

the fraudulent reinsurance contracts
Later years, AIG released statements in accordance
with the generally accepted accounting principles
(GAAP) and began working to fix persisting issues,
providing a clearer view of the struggling company
going forward.
Entering into risky derivatives operations

What went wrong with AIG

AIG Financial Products core business centered around the

derivatives market, namely in selling interest rate swaps.

collateralized debt obligations (CDOs)
By 2007, AIG Financial Products portfolio of credit default
swaps was valued around $500 billion, generating as much
as $250 million a year in income on insurance premiums.
AIG reported a $352 million unrealized loss on the credit
default swap portfolio.
AIG was engaged in another scandal as they planned to
pay executives at AIG Financial Products bonuses totaling
$165 million, despite their actions leading up to the need
for a bailout.

SUBPRIME CRISIS
President

George W. Bushs programme of

Housing For Everyone.
A massive amount of money flowed into the US
from investors abroad, at low interest rates made
the easy credit availability.
Mortgage
lenders approved loans without
examining credibility.
Optimism about housing values led to boom in
home construction, and eventually demand
exceeded the supply

 Fannie Mae and Freddie Mac

The Domino Effect
Home Values declined and adjustable mortgage

payments amount soared which led to default of

huge magnitude
Bear Stearns and Lehman Brothers.
Banks began to holding up their money, and
lending dried up, and the gears of the American
financial system began grinding to a halt.

CAUSES OF SUBPRIME CRISIS

Boom of housing in 2000
Lowered credit Quality (rise from 8% to 20%)
Adjustable rate mortgages(80%).
Attractive rate of returns offered by MBS and

CDOs.
Debt to disposable personal income (rise from
77% to 127%)
Decline of housing prices in mid 2006.

IMPACT OF SUBPRIME CRISIS

9 million job lost in 2008-2009
40% of 2007 GDP was lost
Between Jan to Oct 2008 US stock market suffered

a loss of $8 trillion
Lehman Brother filed for bankruptcy protection on
Sept 15,2008.

INFLECTION POINT
Early 2000s AIGs Financial Product office in

London began selling credit default swaps.

(CDS)
CDS was a product used to insure collateralized
debt obligations(CDOs) against default.
CDOs were a new investment vehicle which
used to lump various types of debt both safe
and risky into one bundle product, many of
which contained exposure to subprime
mortgages.
Thus, the swaps were essentially insurance
contracts on securities and AIG, for a fee,
guaranteed the value of the securities.
The CDO insurance plan worked well for a few
years for the AIG FP increasing their revenue

Continued
By end of 2007, AIG began to experience significant losses

as the value of the securities they were guaranteeing

plummeted.
AIGs counterparties began demanding the company
provide the collateral for the deteriorating security values.
On September 15, 2008 S&P and Moodys downgraded
AIGs credit rating to AA from AAA resulting in a need
for more collateral. Started selling assets. Thus liquidity
crisis for the company.
Next day itself US Federal Reserve provided an $85 billion
credit facility to help AIG meet its collateral obligations. In
exchange, US government received a 80% equity interest
in AIG.
In November, 2008 AIG and US government reached a new
agreement for a total bailout package of $150billion.

Continued
Historically, bond issuers almost never go
bankrupt.
Attractive opportunity for banks and hedge
funds.
Seemingly a low risk event an actual bond
default was happening daily.
Banks and hedge funds selling CDS were no
longer receiving free cash, they were having to
pay out money.
Most banks though, were not that bad off,
because they were simultaneously on both sides
of the CDS trade.
AIG was on one side of the trade only.

COLLAPSE OF AIG
By 2007, AIG Financial Products portfolio of
credit default swaps was valued around $500
billion,
Generating as much as $250 million a year in
income on insurance premiums
Calls for collateral on the credit default
swaps left AIG in a bad position
I n the quarter ending September 30, 2007,
AIG reported a $352 million unrealized loss on
the credit default swap portfolio.
After AIG Financial Products losses hit $25
billion, AIGs stock price plummeted, started
disappointing the shareholders

CAUSES OF COLLAPSE
Fraud in Corporate Reporting
Misuse of Credit Rating
Poor Risk Management

Cassano quoted in 2007, stating, It is hard

for us, without being flippant, to even see
a scenario within any kind of realm of
reason that would see us losing one dollar in
any of those transactions.

The AIG Bailout

Under the terms of Bailout,In Sep 2008,Fed lent

upto $85bn to AIG, and the US Govt will

effectively get 79.9% equity stake in the insurer in
the form of equity participation notes
The 2 year loan carried an interest rate of
LIBOR+8.5 % points
Loan was secured by AIGs assets,including its
profitable insurance businesses giving Fed some
protection.

Why AIG and not Lehman ?

Lehman Brothers was insolvent whereas A.I.G.

was solvent but had liquidity issues

To Big To Fail
Unlike Lehman Brothers, A.I.G. did not ask for a
bail-out but for a bridge loan
In 2008, A.I.G was a one-trillion-dollar American
insurance company that owned more than 240
companies and direct subsidiaries around the
world, most of which were solvent and profitable

Looses
AIG reported the largest loss in corporate history-

$61.7 billion for Q4 2008.

The Dow Jones (DJI) fell nearly 300 points to close
at 6,763.29.
Citigroup and Berkshire Hathaway posted biggest
loss in their history.

Contd
Investment banks, Institutional investors - Mutual

funds, Pension funds and Hedge funds - both

invested in and also were insured by AIG
Example - Goldman Sachs (NYSE:GS) had $20 billion
loss into various aspects of AIG's business
Money market funds (perceived as safe holdings)
invested in AIG through Bonds.
Policyholders of AIG were not at too much risk
because each state has a regulatory agency that
oversees insurance operations, and state
governments have a guarantee clause that will
reimburse policyholders in case of insolvency.

Regulatory changes
International Continental Exchange (ICE) Clear

Credit LLP was set up in US in March 2009.

Proper assignment of credit ratings
Standard for monitoring capital adequacy and risk
exposure of insurers
On 21st July 2010 Dodd-Frank wall street
Reformed Consumer Protection Act.

IMPACT ON SHAREHOLDERS

IMPACT ON EMPLOYEES
Death threats to

senior executives
Protest outside
executives home
End result 15 out of
20 executives
returned the bonus
they received, and
rest donated in
charity.

IMPACT ON GOVERNMENT
President Barak Obama takes the responsibility of

the situation and called for higher regulation.

On July 21 2010, the Dodd-Frank act was signed

into the federal law.

HOW AIG CRISIS WOULD HAVE BEEN

AVOIDED?
Transparent Co-operate reporting
Ethical decision making
Efficient Risk Management

THANK YOU