AIG

Definition

American International Group, Inc. (AIG) is a global insurance and financial services company that became widely known during the Great Recession of 2008 due to its role in the financial crisis. AIG was heavily involved in the issuance of credit default swaps and was ultimately bailed out by the U.S. government to prevent a complete collapse of the financial system, which highlighted the interconnectedness of financial institutions and raised questions about regulation and risk management.

5 Must Know Facts For Your Next Test

1. AIG was founded in 1919 and grew into one of the largest insurance companies in the world, offering a range of products including property, casualty, and life insurance.
2. During the financial crisis, AIG had substantial exposure to mortgage-backed securities and credit default swaps, leading to massive losses when the housing market collapsed.
3. In September 2008, AIG received an $85 billion bailout from the U.S. government, which later expanded to over $180 billion as AIG continued to face significant financial challenges.
4. The government bailout included taking a nearly 80% ownership stake in AIG, making it one of the most significant interventions in American corporate history.
5. AIG's situation raised serious concerns about moral hazard, as it highlighted how large financial institutions could take excessive risks with the expectation of government support in times of trouble.

Review Questions

• How did AIG's involvement in credit default swaps contribute to its downfall during the Great Recession?
  • AIG's downfall was largely tied to its heavy involvement in credit default swaps, which were essentially contracts that provided insurance against defaults on mortgage-backed securities. When the housing market collapsed, many borrowers defaulted on their loans, leading to significant payouts that AIG could not cover. This created a liquidity crisis for AIG, ultimately resulting in their need for a massive government bailout to prevent further damage to the financial system.
• What were the implications of AIG's bailout for regulatory practices surrounding systemically important financial institutions?
  • The bailout of AIG had profound implications for regulatory practices concerning systemically important financial institutions. It prompted discussions about the need for more stringent regulations to prevent such institutions from taking excessive risks without adequate oversight. In response to the crisis, reforms were proposed, including enhanced capital requirements and stress testing for large financial firms to ensure they could withstand future economic downturns.
• Evaluate how AIG's experience during the Great Recession influenced public perception of government intervention in private enterprises.
  • AIG's experience during the Great Recession significantly influenced public perception of government intervention in private enterprises by highlighting both the necessity and risks associated with such actions. While many viewed the bailout as essential to stabilize the economy and prevent a total financial collapse, it also sparked outrage over perceived favoritism toward large corporations at taxpayers' expense. This situation fueled a broader debate about moral hazard and whether government bailouts encourage reckless behavior among businesses that expect future rescues.

Related terms

Credit Default Swap: A financial derivative that allows an investor to 'swap' or transfer the credit risk of a borrower to another party, often used as a form of insurance against default.

TARP:

The Troubled Asset Relief Program (TARP) was a program of the U.S. government enacted in 2008 to purchase toxic assets from financial institutions to stabilize the economy.

Systemically Important Financial Institution (SIFI): A financial institution deemed to be critical to the functioning of the financial system, whose failure could trigger a systemic crisis.