The failure of American International Group Inc. was one of the main narratives from the financial crisis, prompting the push for greater financial market regulation and the adoption of Dodd-Frank. But what if the generally accepted account—that AIG’s supposedly unregulated derivatives activities sank the company—doesn’t actually tell the full story?
American International Group, Inc., also known as AIG, is an American multinational finance and insurance corporation with operations in more than 80 countries and jurisdictions. As of December 31, 2016, AIG companies employed 56,400 people.The company operates through three core businesses: General Insurance, Life & Retirement, and a standalone technology-enabled subsidiary
This document a short presentation of the AIG SCANDAL that happened in 2005.
One of the most serious financial crises of 2000s was seen in the collapse of the insurance giant American International Group (hereinafter referred to as ‘AIG’). AIG is a global company holding the assets worth $1 trillion approximately. AIG was caught in a scandal (American International Group Scam) for fraudulent accounting with the help of General Reinsurance Corporation (hereinafter referred as ‘GRC’). The company declared the loss of revenue by $60 million approximately which also led to a drop in its stocks in the New York Stock Exchange as it was seen as a measure of the falling financial health of the company. To rescue the situation, AIG sought help from the GRC. GRC created two sham transactions of $250 million each to boost the losses in revenue of AIG. These two transactions helped to cover up the losses as AID need not mention the amount in its income statement as no actual risk was transferred but they mentioned the $500 million in their premium revenue which made up the loss reserves to pay claims. As a result of this, there was a false increase in the loss reserves as well as in their total increase for the year 2000 and 2001. For the next five years, at least, AIG crated misleading account statements to deceive investors, regulators and policyholders into believing that the company is running into usual and sometimes exceptional profits.This came into catch when the Attorney General’s office and the Insurance Department started investigating against the malpractices of AIG in the year 2004. Soon after, the U.S. Securities and Exchange Commission (hereinafter referred to as ‘SEC’) joined the investigation accusing AIG of fraud. The officers of the company who provided for this fraud did not face any criminal charges whereas the AIG had to pay a penalty of $1.64 billion to SEC.
American International Group, Inc., also known as AIG, is an American multinational finance and insurance corporation with operations in more than 80 countries and jurisdictions. As of December 31, 2016, AIG companies employed 56,400 people.The company operates through three core businesses: General Insurance, Life & Retirement, and a standalone technology-enabled subsidiary
This document a short presentation of the AIG SCANDAL that happened in 2005.
One of the most serious financial crises of 2000s was seen in the collapse of the insurance giant American International Group (hereinafter referred to as ‘AIG’). AIG is a global company holding the assets worth $1 trillion approximately. AIG was caught in a scandal (American International Group Scam) for fraudulent accounting with the help of General Reinsurance Corporation (hereinafter referred as ‘GRC’). The company declared the loss of revenue by $60 million approximately which also led to a drop in its stocks in the New York Stock Exchange as it was seen as a measure of the falling financial health of the company. To rescue the situation, AIG sought help from the GRC. GRC created two sham transactions of $250 million each to boost the losses in revenue of AIG. These two transactions helped to cover up the losses as AID need not mention the amount in its income statement as no actual risk was transferred but they mentioned the $500 million in their premium revenue which made up the loss reserves to pay claims. As a result of this, there was a false increase in the loss reserves as well as in their total increase for the year 2000 and 2001. For the next five years, at least, AIG crated misleading account statements to deceive investors, regulators and policyholders into believing that the company is running into usual and sometimes exceptional profits.This came into catch when the Attorney General’s office and the Insurance Department started investigating against the malpractices of AIG in the year 2004. Soon after, the U.S. Securities and Exchange Commission (hereinafter referred to as ‘SEC’) joined the investigation accusing AIG of fraud. The officers of the company who provided for this fraud did not face any criminal charges whereas the AIG had to pay a penalty of $1.64 billion to SEC.
The 2008 global financial crisis is said to be the worst financial problem to have faced the world since the Great Depression of the 1930s. The financial crisis was preceded by an economic boom of some sort and high investment levels. In fact, prior to this crisis, many economists had voiced their concerns over the amount of credit flow in the US as well as investments. So what really caused this financial catastrophe and what effects did it have on America and the world at large?
This article will discus the Causes of the Global Financial Crisis of 2008
- See more at: http://www.customwritingservice.org/blog/the-global-financial-crisis-of-2008-causes-and-effects/
Short presentation on fall of the 4th biggest investment bank firm in United States during the period of financial crisis in 2008 which ultimately started recession in Unites States Of America and subsequent impact on whole world of economy.
The 2008 global financial crisis is said to be the worst financial problem to have faced the world since the Great Depression of the 1930s. The financial crisis was preceded by an economic boom of some sort and high investment levels. In fact, prior to this crisis, many economists had voiced their concerns over the amount of credit flow in the US as well as investments. So what really caused this financial catastrophe and what effects did it have on America and the world at large?
This article will discus the Causes of the Global Financial Crisis of 2008
- See more at: http://www.customwritingservice.org/blog/the-global-financial-crisis-of-2008-causes-and-effects/
Short presentation on fall of the 4th biggest investment bank firm in United States during the period of financial crisis in 2008 which ultimately started recession in Unites States Of America and subsequent impact on whole world of economy.
ECO315 Introduction to Money and BankingWEEK6 Homework (Financia.docxjack60216
ECO315 Introduction to Money and Banking
WEEK6 Homework (Financial Crisis)
Throughout the 2008 financial crisis, there are many examples related with the asymmetric information, the adverse problem, the moral hazard by the principal agent problem, and the conflicts of interest.
Find them related with following companies and financial programs:
· Investment Bank such as Lehman Brothers and Goldman Sachs
· Credit Rating Agency
· Subprime loans to collateral debt obligations (CDO)
· Credit default swaps (CDS)
· Fannie Mae and Freddie Mac (GSE)
· House prices and foreclosures
FINANCIAL MANAGEMENT
1. If a firm substitutes fixed for variable costs, which of the following will occur? A. The use of financial leverage will be increased.
B. The degree of operating leverage will be increased.
C. The break-even level of output will be reduced.
D. The profits will always be higher.
2. If investors want to limit financial risk and maximize their control of the business, which of the following
forms of business should they prefer?
A. Limited partnership
B. S corporation
C. Sole proprietorship
D. Corporation
3. A firm does not obtain financial leverage by
A. issuing preferred stock.
B. issuing common stock.
C. issuing bonds.
D. borrowing from the bank.
4. Unsuccessful use of financial leverage
A. increases earnings per share.
B. increases investors' rate of return.
C. decreases earnings per share.
D. decreases interest expense.
5. Which of these situations offers the best rationale for organizing a business as a limited partnership?
A. Management rejects the idea of personally assuming liability for the business.
B. You're an entrepreneur and you want two others' expertise, former business partners, to help execute your business plan.
C. Management needs to raise money through a stock offering, but does not want to relinquish control of the business to stockholders.
D. You want your small new business, which is operating out of your garage, to pay you and your partner (your spouse) dividends for which income tax will only be paid by you or your business, not both.
6. Which of the following is a correct statement about corporate losses?
A. They are carried forward three years and then carried back.
B. They are carried back three years and then carried forward.
C. They offset other sources of income in prior years.
D. They are carried forward to future years.
7. Break-even analysis requires knowing the relationship between
A. sales and total costs.
B. sales and earnings.
C. sales and assets.
D. total revenues and fixed costs.
8. If a firm produces 50,000 widgets and sells each unit for $20.50, what is the total revenue generated by
this production?
A. $1,025,000
B. $100,250
C. $10,250
D. $10,250,000
9. If Sam's Diner has an EBIT of $350,000, what are the diner's net earnings after paying $50,000 in
taxes and $34,000 in interest?
A. $266,000
B. $334,000
C. $311,000
D. $434,000
10. An increase of cost of capital will
A. decrease an invest ...
This publication includes the deal activity in the insurance sector such as overall highlights, key announced transactions, and the outlook ahead. Read our full report to learn more.
סלינגר למנכ"לי חברות הביטוח: חזקו את ההון הראשוני
בערב העיון השנתי לענף הביטוח שערך מכון קסירר אמרה המפקחת על הביטוח דורית סלינגר כי רמת ההון הראשוני של חברות הביטוח נמוכה מאוד. "אנו מצפים מהחברות להגדיל את ההון הראשוני שלהן, וכדאי שזה ייעשה באופן עצמאי ושהרגולטור לא ייאלץ להתערב" – אמרה סלינגר לראשי החברות
Evaluating a Sluggish Economy with Bruce YandleMercatus Center
In the first half of 2016, the US economy skirted close to recession territory but so far has registered positive growth. What are the major forces that seem to be driving the slow-growth economy? Is the economy getting stronger? Or, will we hit recession territory before the end of the year?
The Affordable Care Act fundamentally changed the landscape of the U.S. health care system. With more than five years since the law’s passage, questions remain about how to fix a system that remains broken despite recent reform efforts. Did the Affordable Care Act adequately reform a failing health system, or did that prescription only treat the symptoms of a much larger illness?
With nearly a trillion dollars at stake and draft legislation in development, now is the time for policymakers to free spectrum for innovative 21st century use. In order for 21st century technologies like the sharing economy and the Internet of Things to reach their full potential, and drive economic opportunity, more spectrum must be made available. Federal spectrum reallocation is a win-win-win scenario for the economy, social well-being, and the government.
Buchanan Speaker Series: Education, Inequality, and IncentivesMercatus Center
The F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics welcomed Roland G. Fryer, Jr., the Henry Lee Professor of Economics at Harvard University and faculty director of the Education Innovation Laboratory, for the inaugural Buchanan Speaker Series event on “Education, Inequality, and Incentives.”
Modernizing Freight Rail Regulation: Recommendations from the TRB StudyMercatus Center
In June 2015, the National Academy of Sciences’ Transportation Research Board issued a report with recommendations to update and modernize economic regulation of rail freight transportation. Jerry Ellig served as a member of the committee that prepared the report. This presentation, given to the National Industrial Transportation League’s Railroad Transportation Committee in November 2015, summarizes the report’s main recommendations. For a short narrative that explains the recommendations, see Dr. Ellig’s commentary in Real Clear Policy.
Modernizing the SSDI Eligibility Criteria: Trends in Demographics and Labor M...Mercatus Center
Social Security Disability Insurance program outlays have increased rapidly, roughly doubling in real terms over the past fifteen years.Participation in program (as % of labor-force) has doubled over the past twenty years. Determining the cause of this rapid rate of growth is essential for setting the program on a sustainable, long-term responsible path.
How Can Policymakers and Regulators Better Engage the Internet of Things? Mercatus Center
The world today is seemingly always plugged into the Internet and technologies are constantly sharing data about our personal and professional lives. Device connectivity is on an upward trend with Cisco estimating that 50 billion devices will be connected to the Internet by 2020. Collection and data sharing by these devices introduces a host of new vulnerabilities, raising concerns about safety, security, and privacy for policymakers and regulators.
Amid concerns about government data security, like the recent OPM breach, Congress is considering cybersecurity information sharing legislation. But will a new information sharing program bolster federal information security? If not, what should be done instead?
Tools for Tracking the Economic Impact of LegislationMercatus Center
Laws passed by Congress impact the economy, but Congress has no systematic way to comprehensively track and assess the economic impact of legislative actions. This is especially difficult when laws empower federal agencies to regulate. While the current budget process scores and tracks the economic impact of spending and taxes, it does not account for the economic consequences of regulation.
The Sharing Economy: Perspectives on Policies in the New EconomyMercatus Center
The sharing economy’s rapid rise has transformed how many people work and live, from commuting, shopping, eating, vacationing, and even borrowing money. Firms like Uber, Lyft, and Airbnb seem to be grabbing headlines on a daily basis as they grow into billion-dollar ventures, disrupt local businesses, and create new policy questions for regulators.
To help shed light on these issues, the Mercatus Center at George Mason University invites you to join Research Fellow Christopher Koopman for a Capitol Hill Campus presentation examining the economics and policy issues surrounding the sharing economy.
Sustaining Surface Transportation: Overview of the Highway Trust Fund and Ide...Mercatus Center
The current system of funding highways is unsustainable. Expansion of the use of the trust fund, coupled with decreased revenue from gas taxes, has resulted in the fund falling short of demand for funding.
Stephen C. Goss Presentation for Mercatus Center SSDI PanelMercatus Center
The Social Security Disability Insurance (DI) trust fund’s projected 2016 depletion will require Congress to act soon to prevent large, sudden benefit cuts.
Experts on both sides of the aisle have noted that a “quick fix” of simply shifting payroll taxes from Social Security’s much larger retirement trust fund (OASI) into DI, without further reform, could cost Congress its last chance to solve Social Security’s broader financing problems before it is too late. What more responsible reform options are available?
The Mercatus Center and the Committee for a Responsible Federal Budget hosted a discussion on May 12 on how best to respond to SSDI’s financing crisis.
David Stapleton Presentation for Mercatus Center SSDI PanelMercatus Center
The Social Security Disability Insurance (DI) trust fund’s projected 2016 depletion will require Congress to act soon to prevent large, sudden benefit cuts.
Experts on both sides of the aisle have noted that a “quick fix” of simply shifting payroll taxes from Social Security’s much larger retirement trust fund (OASI) into DI, without further reform, could cost Congress its last chance to solve Social Security’s broader financing problems before it is too late. What more responsible reform options are available?
The Mercatus Center and the Committee for a Responsible Federal Budget hosted a discussion on May 12 on how best to respond to SSDI’s financing crisis.
Jason J. Fichtner Presentation for Mercatus Center SSDI PanelMercatus Center
The Social Security Disability Insurance (DI) trust fund’s projected 2016 depletion will require Congress to act soon to prevent large, sudden benefit cuts.
Experts on both sides of the aisle have noted that a “quick fix” of simply shifting payroll taxes from Social Security’s much larger retirement trust fund (OASI) into DI, without further reform, could cost Congress its last chance to solve Social Security’s broader financing problems before it is too late. What more responsible reform options are available?
The Mercatus Center and the Committee for a Responsible Federal Budget hosted a discussion on May 12 on how best to respond to SSDI’s financing crisis.
Macroeconomics- Movie Location
This will be used as part of your Personal Professional Portfolio once graded.
Objective:
Prepare a presentation or a paper using research, basic comparative analysis, data organization and application of economic information. You will make an informed assessment of an economic climate outside of the United States to accomplish an entertainment industry objective.
Biological screening of herbal drugs: Introduction and Need for
Phyto-Pharmacological Screening, New Strategies for evaluating
Natural Products, In vitro evaluation techniques for Antioxidants, Antimicrobial and Anticancer drugs. In vivo evaluation techniques
for Anti-inflammatory, Antiulcer, Anticancer, Wound healing, Antidiabetic, Hepatoprotective, Cardio protective, Diuretics and
Antifertility, Toxicity studies as per OECD guidelines
Francesca Gottschalk - How can education support child empowerment.pptxEduSkills OECD
Francesca Gottschalk from the OECD’s Centre for Educational Research and Innovation presents at the Ask an Expert Webinar: How can education support child empowerment?
The French Revolution, which began in 1789, was a period of radical social and political upheaval in France. It marked the decline of absolute monarchies, the rise of secular and democratic republics, and the eventual rise of Napoleon Bonaparte. This revolutionary period is crucial in understanding the transition from feudalism to modernity in Europe.
For more information, visit-www.vavaclasses.com
Palestine last event orientationfvgnh .pptxRaedMohamed3
An EFL lesson about the current events in Palestine. It is intended to be for intermediate students who wish to increase their listening skills through a short lesson in power point.
Unit 8 - Information and Communication Technology (Paper I).pdfThiyagu K
This slides describes the basic concepts of ICT, basics of Email, Emerging Technology and Digital Initiatives in Education. This presentations aligns with the UGC Paper I syllabus.
Welcome to TechSoup New Member Orientation and Q&A (May 2024).pdfTechSoup
In this webinar you will learn how your organization can access TechSoup's wide variety of product discount and donation programs. From hardware to software, we'll give you a tour of the tools available to help your nonprofit with productivity, collaboration, financial management, donor tracking, security, and more.
A Strategic Approach: GenAI in EducationPeter Windle
Artificial Intelligence (AI) technologies such as Generative AI, Image Generators and Large Language Models have had a dramatic impact on teaching, learning and assessment over the past 18 months. The most immediate threat AI posed was to Academic Integrity with Higher Education Institutes (HEIs) focusing their efforts on combating the use of GenAI in assessment. Guidelines were developed for staff and students, policies put in place too. Innovative educators have forged paths in the use of Generative AI for teaching, learning and assessments leading to pockets of transformation springing up across HEIs, often with little or no top-down guidance, support or direction.
This Gasta posits a strategic approach to integrating AI into HEIs to prepare staff, students and the curriculum for an evolving world and workplace. We will highlight the advantages of working with these technologies beyond the realm of teaching, learning and assessment by considering prompt engineering skills, industry impact, curriculum changes, and the need for staff upskilling. In contrast, not engaging strategically with Generative AI poses risks, including falling behind peers, missed opportunities and failing to ensure our graduates remain employable. The rapid evolution of AI technologies necessitates a proactive and strategic approach if we are to remain relevant.
1.4 modern child centered education - mahatma gandhi-2.pptx
AIG: The Missing Piece of Its Failure Narrative & Why It Matters
1. AIG: The Missing Piece of Its Failure
Narrative & Why It Matters
Hester Peirce
Senior Research Fellow
2. Why Should We Care?
AIG was one of the biggest bailout events of
the crisis. $182.3 billion was made available
to AIG. We should know why it happened.
Better understanding what happened at AIG
will help us to think about what reforms
should or could be made to prevent a repeat.
3. Today’s Agenda
• What got AIG in trouble?
• Why did government intervene?
• Did Dodd-Frank reforms address
the problems at AIG?
4. The Standard View of AIG’s Downfall
• “AIG Financial Products, operating
out of London, brought down the
company and nearly toppled the U.S.
economy.” Gary Gensler, former Chairman
Commodity Futures Trading Commission, May 2012
5. Alternate View
• “AIG blew up when its stock-
lending shadow bank – an
insurance company – suffered a
run.” Paul Tucker, Deputy Governor Financial Stability,
Member of the Monetary Policy Committee and Member of the
Financial Policy Committee, March 13, 2012
6. The Making of AIG
Founded by Cornelius Vander Starr in 1919 in China
as insurance company
Expanded into other business lines
130 countries
116,000 employees
76 million customers
Maurice “Hank” Greenberg—CEO for nearly 4
decades—presided over much of growth
7.
8. AIG Post-Greenberg
March 2005: Martin Sullivan, a company
insider, took over as CEO
February 2006: AIG paid over $1.6 billion to
settle with DOJ, SEC, and NY on accounting,
bid rigging, and workers comp charges.
June 2008: Company was losing money fast.
New CEO Robert Willumstad came in to
replace Sullivan
10. AIG’s Hundreds of Regulators
AIG entity Regulator
AIG Holding Company Office of Thrift Supervision
domestic insurance companies state insurance regulators
foreign insurance companies foreign insurance regulators
AIG Federal Savings Bank Office of Thrift Supervision
AIG Securities Lending Corp. (after registering as broker-
dealer in 2006)
Securities and Exchange Commission/
Financial Industry Regulatory Authority
AIG’s European operations French Commission Bancaire (coordinating supervisor)
11. Origins of AIGFP
1987: AIG enters into joint venture with
defectors from Drexel Burnham Lambert
Howard Sosin, the original CEO, clashed with
Hank Greenberg
His successor, Tom Savage, had a key
governing principle. . .
15. Credit Default Swaps
A CDS is an over-the-counter derivative
As a derivative financial product, it derives its
value from something else—for CDS bonds
People use CDS to manage risk
AIG sold different kinds of CDS
AIG, with its strong credit-rating was an
attractive counterparty
17. Collateralized Debt Obligations
• Investment-grade security backed by a pool of
bonds, loans and other assets with varying
levels of risk. CDOs bundle the various types
of debt into tranches of distinct maturities and
risk levels, including tranches made of
subprime loans.
--Federal Reserve Bank of New York
18. What Was In Those CDOs?
Lots of Residential
Mortgage-Backed
Securities
19. Was Joe Cassano a Fool or a Sage?
Normally, CDS dealers protect themselves by
hedging their exposure
AIGFP did not hedge; it sold a lot of CDS; it
was on one side of the market
Joe Cassano insisted that he had hedged his
exposure by only offering protection on the
super-senior tranche of the CDOs
20.
21. “super senior” risk layer
(AIGFP net notional exposure)
AAA
A
BB
BBB
equity
realized
credit
losses
allocated
sequentially
portfolio made up of
tranches of securitized
residential and
commercial mortgages,
auto loans, etc. and
further separated into
tranches
AIGFP attachment point
AIG’s Super-Senior CDS
24. Collateral Calls at AIGFP
Starting in August 2007, Goldman and other
counterparties began asking AIGFP to put up
cash margin—essentially a pledge that it could
make good if it had to
AIGFP fought back; the collateral calls were
arguably aggressive and were based on very
little pricing data
25. Unrealized Losses on AIG’s Super-Senior CDS
0
10
20
30
40
50
60
70
80
90
12/31/07 3/31/08 6/30/08 9/30/08
billionsofdollars
net notional value
cumulative fair value loss
26. AIGFP Could Have Been Much Worse
AIGFP stopped writing CDS on multi-sector
CDOs in early 2006—before the housing
market saw its darkest days.
AIGFP based the decision on concern that the
mortgage market was spiraling out of control.
But AIGFP did not make serious efforts to
hedge its existing CDS positions.
29. What Is Securities Lending?
One party lends a stock, bond, or other
security to another & receives cash or other
collateral.
Hedge funds & broker-dealers borrow for
short-selling & other trading strategies.
Life insurance companies, mutual funds &
other holders of large pools of securities lend.
Loans are usually very short-term—may roll
over daily.
30. What Is Securities Lending?
Borrower typically posts excess collateral—
usually 102% to 105%.
Collateral is adjusted through term of loan.
Lender gives a rebate to borrower, the size of
which depends on the scarcity of the security
being lent.
Lenders make money by reinvesting the cash
collateral in low-risk investments.
32. AIG’s Securities Lending Program
AIG set up a joint program for its life insurance
subsidiaries.
The subs pooled their securities and lent them
out in exchange for cash.
AIG’s loans were unusual in that many were
for fixed one-month terms.
33. AIG's Approximate Share of Worldwide Cash Collateral
Reinvestments During Crisis
Rest of world
AIG
Based on data from: Matthew Dive et al., Developments in the Global Securities Lending Market,
BANK OF ENGLAND QUARTERLY BULLETIN 224, 228 (3rd Quarter 2011),
available at http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb110303.pdf.
39. Why Was This a Problem?
Securities lending transactions are short-term;
they often get rolled over, but the borrower is
under no obligation to renew.
When borrowers wanted their cash back,
there wasn’t any—it was all tied up in RMBS.
The program reached its peak at $94 billion in
October 2007 as AIG used proceeds from new
loans to repay old ones.
41. The Crisis Spelled Trouble for AIG
In addition to making new loans to repay old
ones, AIG was selling any of the securities in
its reinvestment portfolio it could sell, but
those securities were not hot sellers during
the crisis.
In 2008, things got worse because borrowers,
along with everyone else, really wanted one
thing . . .
44. Securities Lending Haircuts
The standard in securities lending is to
give the lender 102%-105% of the
security’s value.
When securities borrowers started to get
the upper hand in 2008, they only paid
100%.
Then 98 . . . 95 . . . 80 . . . 73 %.
45. If AIG Didn’t Repay . . .
Borrower could sell securities
Borrower could go after assets of participating
life insurance companies
AIG contributed money to the securities lending
pool to make up for undercollateralization and
losses on securities sold.
46. AIG’s Income and Losses
Reporting period Net income (loss), billions of dollars
2004 9.84
2005 10.48
2006 14.05
1st quarter 2007 4.13
2nd quarter 2007 4.28
3rd quarter 2007 3.09
4th quarter 2007 (5.29)
1st quarter 2008 (7.81)
2nd quarter 2008 (5.36)
3rd quarter 2008 (24.47)
4th quarter 2008 (61.66)
47. AIG’s Stock Price Reflected the Grim State of
Affairs
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
1/1/07 5/15/08 9/27/09 2/9/11 6/23/12
49. Sec Lending Kept New CEO Awake at Night
A problem coming from insurance subsidiaries
would have caused AIG reputational damage
and regulatory issues.
But, AIG did not have cash to spare.
In June 2008, when he started as CEO,
Willumstad quickly realized that securities
lending would be a problem—a liquidity drain
He went to visit . . .
50.
51. Think back to 2008
March 2008: Government subsidized J.P.
Morgan’s purchase of Bear Stearns.
September 2008: Government takes over
Fannie and Freddie.
September 13-14, 2008: Lehman weekend.
September 15, 2008: Lehman files for
bankruptcy.
52. Lehman Weekend=AIG Weekend
As Lehman’s fate was being decided, so too
was AIG’s.
No private sector solution materialized—Wall
Street firms that went in decided AIG needed
more money than its assets were worth.
Insurance regulators tried to cobble together
a quick deal that effectively would use P&C
companies to rescue life insurance companies.
53. Why Rescue AIG?
Could markets handle another big
failure?
What would insurance customers do?
What about AIG’s many
counterparties?
Would European banks be hurt?
54. Fed to the Rescue
$85 billion revolving credit facility from the
Fed under Section 13(3) Authority of the
Federal Reserve Act.
Collateralized by AIG’s assets.
Government got preferred stock convertible
into 79.9% of AIG.
Terms of loan were tough: LIBOR + 8.5%.
55. AIG Spending Rate Was Alarming
AIGFP counterparties were still
asking for money.
Securities lending borrowers
asked for $24 billion between
September 12 and 30, 2008.
56. When It Runs Out, Re-Bailout
October 2008: Fed sets up a $37.8 billion
program to step into shoes of fleeing
securities lending counterparties. AIG could
use cash from Fed to repay counterparties.
November 2008: TARP funds were injected
and Maiden Lane II and III are set up.
57. Maiden Lane Off-Balance Sheet Entities
• Maiden Lane II
To take care of AIG’s
securities sending
problem
$19.5 billion from
government
$1 billion from AIG
AIG’s securities
lending counterparties
were paid off
• Maiden Lane III
To take care of AIGFP’s
CDS problem
$24.5 billion from
government
$5 billion from AIG
Purchased underlying
CDOs from AIG’s
counterparties
58. AIG Payments to Counterparties:
September 16-December 31, 2008
securities lending
46%
AIGFP
54%
59. In contrast to Lehman, the core operations of AIG
were viable and profitable insurance companies.
AIG’s financial difficulties stemmed primarily from
the loss of liquidity to fund collateral calls on its
unhedged derivatives positions in one part of the
company—its Financial Products Division.
--Federal Reserve Chairman Ben Bernanke,
November 2010
60. Were the Insurance Subs Healthy?
Source: DAVID MERKEL, TO WHAT DEGREE WERE AIG’S OPERATING INSURANCE SUBSIDIARIES SOUND? 4 (2009),
available at http://alephblog.com/wp-content/uploads/2009/04/To%20What%20Degree%20Were%20AIG%E2%80%99s%20Operating%20Subsidiaries%20Sound.pdf
61. Year-End Statutory Surplus and Statutory Net Income at AIG’s Life-Insurance
and Retirement-Services Subsidiaries (millions of dollars)
Year Statutory surplus
Statutory net income
(loss)
2006 $35,058 $5,088
2007 $33,212 $4,465
2008 $24,511 ($23,558)
62. Insurance Regulation
Insurance companies are regulated by states in
which they sell insurance.
Insurance regulators had authority to intervene in
securities lending matters.
To avoid conflicts, state regulators coordinate
through the NAIC.
Insurance companies have to maintain a certain
level of capital.
When an insurance company runs into trouble,
state regulators wind it down.
63. Risk-Based Capital System
200% and above
150% and above
100% and above
70% and above
Ratio of
Total
Adjusted
Capital
to
Author-
ized
Control
Level
Risk-
Based
Capital
No
intervention
Company
corrective
plan
Less than 70%
Regulator
exams and
analysis
Regulator may
take control
Regulator
must take
control
65. Why Did Securities Lending Losses Matter?
AIG’s life insurance subsidiaries were in
trouble in the fall of 2008.
Their troubles were placing real liquidity and
capital demands on the AIG parent.
If the Fed had not engineered a bailout, AIG
would have filed for bankruptcy and some of
the life insurance companies would likely have
been seized by state regulators.
66. Why Not Bankruptcy for AIG?
Allowing AIG to fail would have:
Taught a meaningful lesson to other companies.
Careful centralized liquidity and risk management
is important.
Provided regulatory consistency. Lehman was
allowed to fail because it was insolvent. AIG was
insolvent too.
Even after AIG’s initial rescue, government could
have allowed bankruptcy.
67. What Does Adding the Securities Lending Piece of the
Story Tell Us?
• Regulation is not the answer. The life
insurance companies were heavily regulated
by the states.
• There is no basis for assuming that the Fed
will do a better job than the state insurance
regulators did at monitoring risk-taking.
• AIG is not the poster child for Dodd-Frank
derivatives reform that some have suggested
it is.
68. What Should We Do?
• People care about risks when their money is
on the line We need to look for ways to
make shareholders and creditors bear losses
when things go badly.
• We need to make sure that bailouts are not an
option.
• Make bankruptcy work for large financial
companies.
69. AIG Bailout: Investment Success?
Yes, if simply getting paid back is success. In that
case, I’d like to borrow $100 from you today. I’ll pay
it back in 5 years. No, if we consider opportunity cost
and risk.
Lots of companies were looking for cash in 2008.
Private consortium had decided AIG was lousy
investment.
If gov’t is playing investor, it has to consider risk-
reward tradeoff. We could have earned a better
return on a lower-risk investment.