What Is AIG?:
AIG (American International Group), with 116,000 employees, is one of the world's largest insurers. Most of its business is general life, auto, home, business and travel insurance, as well as retirement products like fixed and variable annuities.However, it also moved beyond its traditional insurance business. The Financial Services division also got into aircraft and equipment leasing, capital markets, consumer finance and insurance premium finance. The Asset Management operations provided institutional and retail asset management, broker-dealer services and institutional spread-based investment business.
Why Is AIG Important?:
AIG is so large that its demise would reach into every aspect of the economy. Even traditionally safe investments, such as the $3.6 trillion in money-market funds, have invested in AIG debt and securities. In addition, AIG is also a big insurer of some money-market instruments. Banks around the world are also major holders of AIG's debt.In addition, AIG was a major seller of "credit-default swaps." These swaps insured the assets that supported corporate debt and mortgages. If AIG went bankrupt, it would force the banks that bought these swaps to take write-downs.
How Did AIG Almost Fail?:
In fact, it was the swaps against subprime mortgages that pushed the otherwise profitable company to the brink of bankruptcy. As the mortgages ties to the swaps defaulted, AIG was forced to raise millions in capital. As stockholders got wind of the situation, they sold their shares, making it even more difficult for AIG to cover the swaps. AIG could has more than enough assets to cover the swaps, but couldn't sell them before the swaps came due. (Source: WSJ, U.S. to take over AIG, September 17, 2008)
What Saved AIG?:
The Federal Reserve provided an $85 billion, two-year loan to AIG to prevent bankruptcy and further stress on the global economy. In return, the government received 79.9% of AIG's equity, the right to replace management, and veto power over all important decisions, including asset sales and payment of dividends.The plan was for the Fed to break up AIG and sell off the pieces to repay the loan. However, the stock market plunge in October made that impossible, as potential buyers needed any excess cash for their own balance sheets. Therefore, the Treasury Department will instead purchase $40 billion in preferred shares from its Capital Repurchase Plan. The Fed will purchase $52.5 billion in mortgage-backed securities. The funds will allow AIG to retire many credit default swaps, freeing it up to lend more.
