Home > Free Essays > Business > Case Study > American International Group Bailout

American International Group Bailout Research Paper

Exclusively available on IvyPanda Available only on IvyPanda
Updated: Jun 25th, 2020

The profile of AIG

American International Group (AIG) is a global insurance and financial services provider. Having been founded in 1967, it has its operations based in at least 130 nations with about 116,000 employees (Amadeo Para. 1). Its insurance products range from “general life, home, travel, business and auto insurance” (Amadeo Para. 1). Additionally, AIG leads in the provision of both retirement (including both fixed and variable annuities) and asset management services worldwide.

Moreover, the company provides leasing and insurance premium finance through its Financial Services division, in addition to the “Asset Management operations providing institutional and retail asset management, broker-dealer services, and institutional spread-based investment business” (Amadeo Para. 2). Nevertheless, the company has its shares trading in New York stock exchange as well as other International countries capita l markets (AIG Website 2009).

Cause of AIG bailout

AIG’s collapse is said to have been mainly caused by billions of credit default swaps (CDS’s), an operation used by financial institutions but is not very common within the public domain. Credit default swaps are basically business operations that insure against defaults of bonds, corporate debt and securities that are mortgage related (Amadeo Para. 3). An increase in the mortgage-based defaults compelled AIG into raising more capital, and as most stakeholders received this information, they moved swiftly to pull out their shares.

This even incapacitated AIG’s ability to cover the swaps; however, since swaps had not come due, AIG could not sell its already surplus assets to cover for them (Amadeo, 1). Among many efforts, the last attempt by AIG management was to initiate a secure lending program with other private financial institutions. However, none of the private financial institutions proved cooperative. It is at this point that the government decided to intervene (Sjostrom, 2009).

Review of some Arguments for the bailout of AIG

Some arguments have been put forth in support of AIG’s bailout. First, since AIG is the world’s leading insurer, its perpetual bankruptcy would have caused the economic recession experienced in the year 2008 to increase, as well as increasing interest rates (Troubled Asset Relief Program: Status of Government Assistance Provided to AIG 11). This can be viewed from the perspective that given the diversity of insurance products such as travel, home, business, among others, a time when the world was experiencing a credit crunch is when the need for these services was inevitable.

Provision of auto insurance for instance is a very essential service that AIG was providing. This can be attributed to the kind of economic importance brought by the transport industry. This ranges from employment enhancement to promotion of diverse kinds of trade, both of which contribute positively to the global economy. Auto-related accidents are very common in most countries, and this calls for a reliable insurance provider. It is a fact commonly known that automobiles cannot render their services without a well spelt out insurance cover. Allowing AIG to fall could therefore also imply allowing the fall in the transport industry. Since AIG has its subsidiaries in more than 130 countries where this service provision is crucial, its collapse could as well have affected negatively the global economy.

Secondly, being a member of the New York stock exchange requires that a Credit default Swap (CDS) based firm’s (like AIG in this case) collateral should be posted depending on both credit spreads and credit ratings. As home-based companies declined, credit spreads increased and AIG’s collateral requirements shot up. However, since AIG was already on the verge of collapsing, there is no way its collateral could have measured up to the standards of the New York stock exchange requirements. It was therefore needful for the government to intervene in the situation since there was no other source of finance.

Thirdly, there is a moral hazard allowing companies to fall based on their size if faced by bankruptcy. Since AIG was too big to fall, moral bankruptcy was not considered in its case. An organization with a comparably smaller asset share could have been let to fall without any intervention mainly because the economic impact of such a small firm may just be national, hence its collapse may not have far-reaching economic consequences (Troubled Asset Relief Program: Status of Government Assistance Provided to AIG 11). The size of AIG could be viewed from not only its asset value, which is said to have been about 1.6 trillion dollars, but also from the range of services it provided and the number of people it employed (Sjostrom 2009).

Fourthly, according to the Federal Reserve Act, secured loans have terms and conditions allowing for the protection of the interests of taxpayers and those of the U.S government. AIG had been collateralized by its AIG assets together with those of both regulated and non-regulated subsidiaries. All these assets were to be sold and the revenue be used to repay the loan. It is due to this reason that the Federal government released eighty five billion dollars to the American International Group. In return, the government took over a larger percentage of AIG’s equity, and had veto power to make very crucial decisions for the firm such as asset sales, hiring new management and dividends payment.

Fifthly, the Federal Reserve Board of the U.S government’s federal department had argued that, failure of AIG would have increased the then already existing financial fragility, raised borrowing costs as well as weakens both household wealth and the national economic performance (Anon 2008). Moreover, this collapse would have impacted heavily on the solvency status of both the insurance and banking industry in the country, given that the sensitivity of financial market’s solvency may influence the direction of solvency in the entire insurance industry (Kowalewski and Mascaro 19).

Sixthly, insurance industry promotes investment especially in the industrial, commercial, and agricultural sectors (Shahid Para.1). The growth of these sectors contributes to national economic growth. Therefore, the collapse of AIG could have hampered the growth of these sectors within the nations where it had its subsidiaries. In addition to this, collapse of the AIG could have meant the unemployment of the 116,000 people working for it, who also contributes immensely towards the economy. Loss of jobs for them will therefore subsequently curtail the economy as well as plunge them together with their families into serious social-economic plight.

Moreover, since AIG provided retirement products like fixed and variable annuities, its collapse could have had far-reaching repercussions on the beneficiaries of these services. Since this was a period for global recession, the only thing that could have benefited the retirees in more than 130 countries was the annuities. This is because the annuities are not only safeguarded from the negative effects of inflation but are also protected from any levying, garnishing or suing by either lawyers or creditors in most states.

Additionally, key financial institutions had insured themselves with the American International Group and collapse of the latter would have had far-reaching financial implications on the insured firms. This could even mean paralysis of their operations incase of the maturation of any of the insured policies. This is possible because the firms had contributed periodical premiums with AIG and its subsidiaries. Loss of these premiums could therefore be the result of AIG’s collapse.

Moreover, collapse of AIG could have affected those global financial institutions that invest in securities. This could have in turn made them reappraise their securities and consequently reduce their capital share. Indeed, “if A.I.G. had collapsed — and been unable to pay all of its insurance claims — institutional investors around the world would have been instantly forced to reappraise the value of those securities, which in turn would have reduced their own capital and the value of their own debt” (Anon 2008).

The business insurance service provided by AIG did not only benefit the financial institutions but also a variety of so many other businesses around the world (Warren 288). The existence and survival of all these businesses depends entirely on the existence of the AIG such that incase any business suffers loss due to either theft or fire, the insurance company is there to compensate it (Shahid Para. 3).

Most businesses with the business insurance policy cover had invested their premiums with AIG. Therefore, he collapse of AIG could then dictate that they lose their cumulative premiums together with compensation benefits arising from the maturation of that policy. Moreover, the bailout of AIG was as important as global economic importance of the services provided by the businesses that had been insured under it.

Some financial markets that had shown worries over the collapse of the American International Group on the eve of the bailout reacted positively just a day after the bailout, revealing that the entire process was very necessary. Stocks in both the United States and Asian markets also went up indicating that the bailout had a positive economic impact (Anon, 2008). The fact that the positive effects of the bailout began manifesting just within this very short time further reveals economic significance attached to the whole process. It also indicates better economic prospects in the future.

After the bailout, there was too much pressure from the media, public, and the US congress on AIG concerning the main beneficiaries of the taxpayer’s money. AIG is reported to have released data indicating the main beneficiaries of the billions. The report indicates that Goldman Sach’s group, AIG’s greatest trading partner, was the main beneficiary and had received a lucrative share in various payouts.

The report also disclosed that AIG had made payments amounting to 44 billion to twenty other banks in the U.S, Canada, and Europe (Anderson Para. 6). This must have been a major boon to these companies, their stakeholders, clients and generally their respective national economies. Data concerning financial institutions that have benefited from the bailout is shown in the table below. The graph drawn based on the table has the names of financial institutions that benefited on the x-axis and the amount they benefited from (in billion dollars) on the y-axis.

Beneficiaries of the AIG bailout

Institution Total (in $blns)
Goldman Sachs Group 12.9
Société Générale 11.9
Deutsche Bank 11.8
Barclays plc 8.5
Merrill Lynch & Co Inc 6.8
Bank of America Corp 5.2
UBS AG 5
BNP Paribas SA 4.9
HSBC Holdings PLC 3.5
Dresdner 2.6
Total Payments to Top 10 73.1
Beneficiaries of the AIG bailout

Various parties regarding the bailout of AIG have made several arguments against the same. In a most recent one, the United State treasury secretary is facing a federal lawsuit accusing the government for violating the constitution. In addition, the government is accused for using the taxpayer’s money to bail out the American International Group whose business activities are not Christian based, but Islam compliant (Touryalai, 2008). The lawsuit actually exposes both national security and constitutional concerns. The national security concern is raised because most people view the American International Group as not only anti-American, but also a key promoter of radical Islamic based activities.

Bearing in mind that during September 11, 2001 Islamic supported groups attacked America and killed innocent lives, America in a bid to retaliate went to Iraq and Afghanistan to engage Islamic terrorist activities. The lawsuit also challenges the government disbursement of public funds and the purposes for the same. This is in view of the fact that Christian and Jewish Americans who pay tax to the government (Murray 2008) cannot support the activities of the American International Group being Islam compliant.

They cannot therefore just sit back and see their money being utilized on purposes that are not both religious and constitutionally sensitive. However, the U.S government defended itself against this complaint on the grounds that as discussed earlier, secured loans have terms and conditions allowing both interests of the government and those of taxpayers to be safeguarded. This was to be achieved through the government selling the company assets to repay the loan as well as reserving the mandate to oversee the company operations.

Conclusion

The profile of the American International Group is indisputably a very distinctive one. This is characterized by its enormous capital share, its number of employees, the global jurisdiction of its operations, and consequently the impact of its existence and operations to the global economy. The time when it began sinking into bankruptcy was quite untimely for its collapse given that it was during a global economic recession. It is therefore evident that the bailout of the company was inevitable. Being the global leading provider of insurance, retirement, financial and asset management services, so many institutions would have collapsed due to its collapse.

Such institutions include the transport industry, financial organizations, agricultural industry, the family institution, and generally the commercial sector. The existence of the American International Group contributed to the growth of not only the United States economy, but also that of the entire world. This can be viewed from its spread in more than 130 countries and jurisdictions. The bailout was inevitable since it could go a long way to curbing massive global unemployment and protecting retirees from the effects the then global economic recession.

The bailout was also important so as to meet the standards of AIG’s inclusion in the New York Stock exchange. Moreover, given that AIG was too big to be allowed to fall, it was necessitated by the firm’s big asset share, and generally, due to the role it played in the global economic development. From the foregoing discussion, it is clear that the reasons for the bailout of AIG overshadow those that are opposed to it. In this regard, it suffices to conclude that the bailout of AIG, though coupled with some political economic hurdles and legal tussles, was very necessary, not just to financial firms in the United States, Canada, and Europe, but also to the rest of the world.

Works Cited

Amadeo, Kimberly. About.com: U.S economy. 2008. Web.

AIG Website. ”Information about AIG.” AIG.com. 2009. Web.

Anderson, Kevin. guardian.co.uk. 2009. Web.

Anon. The big picture. 2008. Web.

Kowalewski, Kim and Mascaro, Angelo. DIANE Publishing. 1994. Web.

Murray, Kevin. In the United States district Court for the Eastern District of Michigan. 2008. Web.

Shahid. 2006. Web.

Sjostrom, William. “The AIG bailout.” Washington and Lee Law Review, Vol. 66, p. 943, 2009 2008.

Touryalai, Halah. AIG bailout unconstitutional? 2008. Web.

Troubled Asset Relief Program: Status of Government Assistance Provided to AIG. 2009. NY, DIANE Publishing. Web.

Warren, Elizabeth. NY, DIANE Publishing. 2010. Web.

This research paper on American International Group Bailout was written and submitted by your fellow student. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly.
Removal Request
If you are the copyright owner of this paper and no longer wish to have your work published on IvyPanda.
Request the removal

Need a custom Research Paper sample written from scratch by
professional specifically for you?

801 certified writers online

Cite This paper
Select a referencing style:

Reference

IvyPanda. (2020, June 25). American International Group Bailout. https://ivypanda.com/essays/american-international-group-bailout/

Reference

IvyPanda. (2020, June 25). American International Group Bailout. Retrieved from https://ivypanda.com/essays/american-international-group-bailout/

Work Cited

"American International Group Bailout." IvyPanda, 25 June 2020, ivypanda.com/essays/american-international-group-bailout/.

1. IvyPanda. "American International Group Bailout." June 25, 2020. https://ivypanda.com/essays/american-international-group-bailout/.


Bibliography


IvyPanda. "American International Group Bailout." June 25, 2020. https://ivypanda.com/essays/american-international-group-bailout/.

References

IvyPanda. 2020. "American International Group Bailout." June 25, 2020. https://ivypanda.com/essays/american-international-group-bailout/.

References

IvyPanda. (2020) 'American International Group Bailout'. 25 June.

Powered by CiteTotal, citation generator
More related papers