Many people are outraged that AIG paid $165 million in bonuses after requesting up to $170 billion in government bailout funds. Some have even made death threats against its CEO, Edward Liddy, and its employees. Understand why the bonuses were paid, why the bailout was made and what led to AIG's near-bankruptcy. Learn what would have happened to your personal finances if AIG had failed.
AIG CEO and Chair Edward Liddy was hired by the
Federal Reserve for a $1 salary last October. He has successfully overseen a difficult strategy that has safely reduced many of the outstanding
credit default swaps. This protects your ownership in the company as a taxpayer. It also protects your retirement portfolio, since many mutual funds and even money market funds have invested in AIG's swaps.
Federal Reserve Chairman
Ben Bernanke said that AIG's bailout made him more angry than anything else in the
recession. AIG took risks with unregulated products, like a
hedge fund, while using cash from people's insurance policies. The Fed stepped in to avoid the same kind of economic collapse that occurred when
Lehman Brothers went bankrupt in September 2008.
The Federal Reserve's $85 billion bail-out of insurance giant AIG was revised. The
Treasury Department purchased $40 billion in preferred shares as part of its Capital Repurchase Plan. The Federal Reserve purchased $52.5 billion in
mortgage-backed securities. The funds allowed AIG to retire more credit default swaps, stave off bankruptcy and protect the government's original investment.
The Fed owns 79.9% of AIG's equity. It hired Edward Liddy as CEO to break up AIG and sell off the pieces to repay the loan. However, no one is buying until market conditions improve. Meanwhile, Liddy has to unwind billions in credit default swaps.
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 trigger the bankruptcy of many of the financial institutions that bought these swaps. Most mutual funds own AIG stock. Financial institutions around the world are also major holders of AIG's debt.
