Aig and the Financial Crisis - 1972 Words

AIG and the Financial Crisis In 2008 United States of America suffered a massive financial crisis. The entire economy was affected, and a lot companies were forced into bankruptcy. AIG was on the verge of being bankrupt until the government decided to bailout the company. Now the AIG is being controlled by the government to restructure and recover assets. According to Kathy Gill about 80 percent of the AIG is controlled by the government (Gill). There are many reasons that lead to the fall of one of the largest insurance company in America, but the four that stand out the most are leverage provided by the government, the creation of Collateral Debt Obligations (CDO), the use of Credit Default Swaps (CDS), the arrogance to believe nothing†¦show more content†¦Companies got to greedy and started to make CDO’s out of Subprime mortgages instead of prime mortgages. The difference between prime mortgage and subprime mortgage is the risk involved. Subprime mortgages are the riskier security, and when th e companies couldn’t find any prime mortgage they turned to the subprime mortgages. This greed lead to the fall of AIG, because of the risky CDO’s that AIG was involved with. Since the CDO’s defaulted AIG had to provide companies money for the insurance they guaranteed on those CDO’s. With tons of these CDO’s failing all the companies started to perform poorly too, and eventually the financial crisis had started to take a toll on the economy. How did Credit Default Swaps work? The insurance that AIG provided was one of the main problems that lead to the company’s destruction. Credit Default Swaps (CDS’s) were insurances for the CDO’s that other companies owned. It’s humorous when looking at the description of Credit Default Swaps (CDS’s) because it does not make sense since it means insurance for the debt you own. CDS’s were created by a group of bankers from JP Morgan in 1994 on a trip to Florida (Philips). They were trying to come up with a plan where they can lessen the risk for the loans they give out. According to Matthew Phillips JP Morgan †¦ â€Å"built up a â€Å"swaps† desk in mid-90s and hired young math and science grads from schools like MIT and Cambridge to create a market for a complex instrument. (Philips)†Show MoreRelatedAmerican International Group Inc.1247 Words   |  5 PagesIntroduction American International Group Inc. or simply AIG specializes in the insurance industry. It is engaged in a range of insurance related businesses in the United States and across the borders. It maintains and operates four main business segments: General Insurance, Domestic Life Insurance Retirement Services, and Foreign Life Insurance Retirement Services. AIG also offers financial services to its customers (one source, 2011). 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