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Running head: A2 Assignment

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A2 Assignment

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CASE STUDY OF AMERICAN INTERNATIONAL GROUP (AIG)

INTRODUCTION
American International group is a global insurance organization, founded in 1919 with its headquarters
in New York
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1 It has three main business divisions-AIG Property
casualty that provides insurance products and services to commercial, institutional and individual
consumers
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(AIG, Wikipedia)2
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This giant multinational insurance company had “about $1
trillion in assets prior to the crisis, lost $99
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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” (Neyburg, What Went wrong at AIG? 2015)
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In the early 2000s, a
new trend of collateralized debt obligation(CDO) became prevalent among many financial institutions
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CDOs, however, comprised mainly
of the tranches of the riskiest mortgage bonds, mostly AAA rated and BBB rated (subprime mortgages)
which made them look safer
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d)4
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The chances of having to pay out on

this insurance were highly unlikely, and for a while, the CDO insurance plan was highly successful
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5% of
the entire company's total
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In 2007, when the interest rate hiked, Individual
mortgages began to go down subsequently leading to collapse of CDO
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“The annual trickle of

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http://www
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com/about-us/news-and-media
https://en
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org/wiki/American_International_Group#Recent_News
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http://insight
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northwestern
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com/@danwwang/the-cdo-the-cds-and-the-subprime-mortgage-crisisc1aa28c01116#
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investopedia
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asp
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premiums they paid gave them the claim to the billions in worth of outstanding CDOs”
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d
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Since, it was considered too big to fail, the Fed and the Treasury Department of
US stepped in and offered almost 150 billion loan in exchange of 80% of company’s equity
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AIG IN FINANCIAL CRISIS
Apart from the CDOs and CDs fraud, there were also internal security lending problems which further
added about 69 billion of outstanding loans in addition
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AIG suffered a major decline in stock price and company credit rating
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The counterpart banks- Goldman Sach, JPMorgan would come for
money as per contract and even after paying these collaterals, they had to pay more billion dollars to
them
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Late that month, AIG announced a $5
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In May, AIG
announced another record quarterly loss, of $7
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By August, AIG had increased its estimates for
what it might ultimately lose on the swaps in the case of defaults to as high as $8
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Mr
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Gorton, on whose models AIG blindly relied
on left his job even before the company collapsed in September 2008, if the government had not plunged
in for bailout
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” The Treasury Department purchased $40 billion in AIG preferred shares from its
Capital Repurchase Plan
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5 billion in mortgage-backed securities
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(Amadeo, 2008-The details of the bail
out, AIG Bailout: Cost, Timeline, Bonuses, Causes, Effects,2016)9
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com/ijcrbapr15/1-46apr15
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pbs
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wsj
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7

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http://useconomy
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com/od/criticalssues/tp/AIG_Bailout
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A2 Assignment

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Industrial Average had plummeted too low since 1997, investors were skeptical about Obama’s economic
stimulus
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But immediately after the bail out AIG planned to pay $165 million bonuses to the CEO’s in the same
business unit as per the contract, which seemed highly unacceptable and was severely criticised for the
company on the brink of collapse
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American International Assurance and American life insurance
company(ALICO) was undertaken by Fed
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(Actions related to AIG, Federal Reserve bank of New York,
n
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)11There were changes in AIG’s corporate governance, reducing the number of board of directors,
while the outside auditor, Princewaterhouse and sold off many of its foreign subsidies including AIA and
ALICO
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The office of Thrift Supervision, being its regulator at the time of crisis, Office of the comptroller of the
currency is now the regulatory authority only for AIG Federal bank savings
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They are simplifying their structure, achieving greater transparency and
continue to be innovative and profitable
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AIG has recently launched Crowdfunding
Fidelity to” protect investors from equity crowdfunding platforms against issuers fraud” (AIG Launches
Crowdfunding Fidelity, a New Solution for the Crowdfunding Economy,2016)14
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AIG “Board

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http://www
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com/articles/SB123738312138170487
https://www
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org/aboutthefed/aig
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https://www
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gov/Audit%20Reports/AIG_Remains_in_TARP_Mini_Book
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aig
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aig
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AIG is considering to make
environmental friendly moves too; it would allocate equity investments to projects that mitigate
greenhouse mitigation
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CONCLUSION
A lesson has been learned by all the insurance companies taking AIG as an example
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One must analyse the
good and evil sides of starting a new venture
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Although Federal Reserve intervened before the collapse of AIG but this might not happen with
all big insurance companies, as it is much of injustice to taxpayers by using public money and prevents
any future reforms in the economy
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(Wolfson, The Bailouts revisited,
2009)17

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https://www-160
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com/strategyupdate
http://media
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net/media_files/irol/76/76115/aig_climate_change_updated
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dollarsandsense
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html
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REFERENCES

AIG
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Retrieved from
https://en
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org/wiki/American_International_Group#Recent_News
Actions related to AIG
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newyorkfed
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About us
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aig
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Creating a Leaner, More Profitable and Focused Insurer
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aig
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Retrieved
from
http://www
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com/about-us/news-and-media/featured-news/aig-launches-crowdfunding-fidelity-anew-solution-for-the-crowdfunding-economy
AIG Policy and programs on Environmental change
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corporate-ir
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pdf
AIG Remains in TARP as TARP’s Largest Investment (2012)
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Retrieved from
https://www
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gov/Audit%20Reports/AIG_Remains_in_TARP_Mini_Book
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Fair Value and Financial Crisis 2007-2008
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6(12)
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com/ijcrbapr15/1-46apr15
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AIG Bailout: Cost, Timeline, Bonuses, Causes, Effects
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about
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htm

Critenden&Yoest (2009)
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Retrieved from

A2 Assignment
http://www
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com/articles/SB123738312138170487
Das(n
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) What happened to AIG? Retrieved from
http://www
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org/wgbh/pages/frontline/oral-history/financial-crisis/tags/aig/
Gethard (2014)
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Retrieved from
http://www
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com/articles/economics/09/american-investment-group-aig-bailout
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Behind AIG's Fall, Risk Models Failed to Pass Real-World Test
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wsj
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What Went Wrong at AIG? Retrieved from
http://insight
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northwestern
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How Are Collateralized Debt Obligations and Credit Default Swaps Structured? Retrieved
from
https://medium
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85l0toa55
Wolfson (2009)
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Retrieved from
http://www
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org/archives/2009/0909wolfson

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