The Fall Of A Mighty Giant: American International Group Inc
The fall of a Mighty Giant: American International Group Inc.
In 2007, American International Group was on top of the corporate world. It boasted over a trillion dollars in assets, one hundred and ten billion dollars in revenue, six billion dollars in net income, and a ranking of number 6 on Forbes top 2000 companies. In June of 2007, AIG was trading at $72.14 per share on the Dow Jones Industrial Average. Today you could get a share for a quarter and a dime. What happened to make this enormous institution fall so fast, so furiously? Insuring toxic assets and developing shady financial transactions with the manipulation of its triple A rating caused a titan to collapse.
The origin of AIG's failure goes back to the development of AIG Financial Products in 1987. A brilliant man named Howard Sosin and two of his colleagues pitched a new financial plan for investing to the then CEO Hank Greenberg. Hank believed in their new innovative ideas and so AIG Financial Products was formed. With the backing of the Triple A credit rating (the highest possible credit rating only given out to a handful of the best most stable companies), Sosin and company were able to delve into financial transactions that were never done before. Financial Products netted on average one hundred and fifty million dollars a year in profits in its seven year run under Sosin's leadership. Increasing feuds with CEO Greenberg led to Sosin's replacement after a nice $150 million dollar settlement. Howard Sosin and his team engaged in many intricate and innovative investment strategies but they always made sure that the investments were done the safest way possible. Under new leadership AIG Financial Products created more profits, but engaged in more dangerous activities. This led to the greatest of AIG's problems, securing the collateralized mortgage obligation or CMO for short.
When AIG management decided to secure dangerous CMOs such as the sub-prime mortgage, many profits were made initially but the housing crisis led to the worst possible situation for AIG. Before the bubble burst AIG became so intertwined in the world market with many corporations, banks, and governments it was thought of as being too big to fail. However, when AIG decided to secure CMOs they took on serious risks. When a security defaults AIG is forced to pay the remaining balance. Also, when a security lowers in value the middlemen (trading partners) dealing with the swaps can call on AIG for collateral causing its own credit rating to be lowered. At the start of the recession in late 2007, companies such as Goldman Sachs collected billions of dollars from AIG for the decline of value for the CMO securities.
The two elements of risk that AIG took on caused a need for hundreds of billions of dollars when the housing bubble burst. AIG lost over a hundred billion dollars in the fiscal year of 2008 and an astonishing $62 billion dollar loss in the fourth quarter alone. It is clear to see that the insurance force is very capable of failing, unlike its Triple A credit rating would like to tell you. However, it is not the means of AIG failing, but the possibility of it failing that brought the US government into the fold with massive bailout money. The investments over the last twenty years that AIG Financial Products participated in would create a catastrophic effect throughout the world markets if the insurance company folded. AIG holds a market share for most of the international insurance needs, such as the airline industry, insuring both Boeing and Aero bus. It is tied to all the major banks and its collapse could very well result in their collapse. A genius idea of Sosin to involve currency dealings, hedging, interest rate swaps, and stock and bond transfers all in one transaction created an interlocking system that has AIG at the center of the financial world. This is the reason why the Fed has stepped in with over $150 billion dollars in aid and more to come so AIG cannot simply fold.
All the risky dealings that AIG was performing went almost unnoticed to the public. Hiding behind its Triple A credit rating allowed AIG to perform financial transactions that are normally associated with junk bond dealers. Fed Chairmen Ben Barnanke has stated, "AIG exploited a huge gap in the regulatory system, there was no oversight of the financial- products division, this was a hedge fund basically that was attached to a large and stable insurance company." The truth is no one knows what will happen to AIG, since it regularly calls on the federal government for billions of dollars and seems to be falling with no end in sight. One thing is for sure no company that is this large and has this great of a financial hold on the world has ever collapsed and that makes the fear of the unknown a driving force in the massive bailouts to keep AIG afloat.
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