AIG

Amanda Biernacki
March 3, 2016

ACCTG.305.01
Intermediate Accounting II
 Introduction
American International Group, Inc. is an international insurance corporation based in the

United States, with its headquarters located in New York City, New York. They have hundreds of

locations throughout the Americas, Europe, Asia Pacific, Middle East, and Africa. They serve

over 90 million clients, including businesses and individuals. They provide their customers with

many insurance related products including life insurance, property casualty insurance, and

mortgage insurance. In addition, AIG supplies consumers with various retirement products and

financial services (AIG, 2015).

Chronology of the Crisis

credit-default swap portfolio. AIG would insure collateralized debt obligations backed by

subprime mortgages. If a collateralized debt obligation were to default, AIG would pay the value

price of the security to the credit-default swap purchaser. In addition, AIG had agreed that they

would post collateral if the value of the securities of the credit rating of AIG declined. Problems

began for AIG when the mortgage market began to decline (Kiel, 20008).

During this time, AIG held numerous meetings with investors stressing the safety of the

credit-default swaps, stating that the declining mortgage market was not putting the company at

risk. Companies, like Goldman Sachs, started requesting that AIG post collateral in case these

CDOs defaulted (Mollenkamp, 2008). As the securities backed by the credit-default swaps

declined in value, AIG was forced to report increasing amounts of unrealized losses. AIG

claimed that the value of the securities would eventually increase, and they would never have to

realize these losses (Kiel, 20008).

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 In 2007, American International Group, Inc. reported a total of $11.5 billion unrealized

losses and posted $5.3 billion in collateral. The company raised $20 billion in private funds

during May of 2008 in order to help with the growing financial problems they were

experiencing. On September 15, 2008, Standard & Poors lowered AIGs credit rating (Kiel,

20008). At this time, AIG had below AA- credit ratings from Standard & Poor's, Moody's, and

Fitch Group (Northwestern, 2015). Because of its lower credit rating, AIG was required to post

an additional $14.5 billion in collateral (Wall Street Journal, 2008). AIG was no longer able to

keep up with its financial problems.

On September 16, 2008, American International Group, Inc. received a government

bailout of $85 billion, which was to be repaid in two years. The United States Treasury

Department purchased $40 billion worth of AIG preferred stock, and $52.5 billion worth of

mortgage-backed securities were purchased by the Federal Reserve. In exchange, the

government received interest and 79.9% equity in AIG (Board of Governors, September 1,

2008). AIG received an additional $37.8 billion from the Federal government on October 8, 2008

(Board of Governors, October 8, 2008). On November 10, 2008, the New York Fed agreed to

purchase the credit default swaps worst performing securities. In addition, the Fed agreed to pay

$30 billion to terminate the credit default swaps, while AIG agreed to pay $5 billion. The $72

billion in collateral posted by AIG was kept by the banks. (Kiel, 2008).

The following graph shows a timeline of AIGs financial crisis. The timeline starts in

2007, and it includes important dates leading up to AIGs bailout on September 16, 2008 (Board

of Governors, September 1, 2008).

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 Auditor Repercussions
American International Groups auditor is PricewaterhouseCoopers. In 2008, a class-

action lawsuit was brought against PwC by the Ohio Public Employees Retirement System, State

Teachers Retirement System, and Ohio Police and Fire Pension Fund. The plaintiffs were

seeking damages for investors who purchased securities from America International Group, Inc.

between the years of 1999 and 2005 (Canham, 2008).

The case claimed that PwC did not properly conduct its audits of AIGs financial

statements, violating security laws and issuing unqualified audit opinions (Canham, 2008).

Plaintiffs in the case claimed that AIG did not properly account for a numerous transactions,

which should have been discovered during the auditing process (Cohn, 2008). PwC had a

settlement of $97.5 million for abetting the fraud. PwC claimed to have settled in order to avoid

litigation costs and increased exposure to risk, while denying any guilt in the case (Canham,

2008).

Stock Prices
American International Group, Inc. has numerous competitors in both the insurance and

financial sectors. The Travelers Companies, Inc. is one of AIGs major competitors in the

insurance industry. Some of its largest competition in the financial industry comes from the

American Financial Group and Hartford Financial Services (Narrative Science, 2012). The

following graph plots the performance of AIG and its main competitors from 2006 to 2011 based

on their average closing prices per month.

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 Affected Stakeholders

American International Groups financial crisis and 2008 bailout effected a variety of

stakeholders. Some of the major stakeholders in this crisis included the federal government,

taxpayers, AGIs shareholders, and AGIs employees. The following section identifies each of

these groups and explains the effects American International Groups financial crisis and bailout

had on them.

Government

American International Group, Inc. received billions of dollars from the federal

government when the company was no longer able to raise adequate collateral and manage its

losses. As was previously mentioned in the chronology of the crisis, the government received

interest and 79.9% equity in AIG in return for the loan it gave to the company. Additionally, the

United States Treasury Department sold its last 234 million shares of AIG stock in 2011 for $7.6

billion. In total, the government made about $23 billion in profit from its loan to AIG (Carney,

2012).

Taxpayers

Due to the government bailout of American International Group, Inc., taxpayers were not

stakeholders in AIG, whether they wanted to be or not. The AIG bailout was extremely

controversial, and many taxpayers did not agree with the governments decision. Taxpayers felt

that their money was going to bailout a company that was failing because of the risky and

unethical decisions of its executives. However, the bailout minimized the damages of AIGs

decisions, and taxpayer dollars used in the bailout were regained with a $23 billion profit when

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the Treasury Department sold the last of its AIG shares in 2011 (Carney, 2012).

Shareholders

Investors in American International Group, Inc. experienced substantial losses as a result

of the AIG crisis. As previously shown on the graph Performance of AIG and Competitors, the

price per share of AIG stock dropped dramatically during this time (Yahoo Finance, 2016). A

class action lawsuit was filed against AIG by its shareholders, who accused the company of

concealing the risky nature of the credit default swaps. AIG agreed to pay a $970.5 million

settlement to investors who purchased stock between March 16, 2006 and September 16, 2008

(Reuters, 2015).

Employees

Shortly after receiving the bailout money from the federal government, American

International Group, Inc. paid out $165 million in bonuses to its employees. AIGs decision to

pay out bonuses after receiving government money was very controversial, and the action

angered many people. AIGs CEO Edward Liddy even received death threats due to the payment

of these bonuses. The bonuses were given out to approximately 400 employees and amounts

ranged from $1,000 to as high as $6.5 million (Andrews, 2009)..

AIG explained most of these bonuses as retainment bonuses. In addition, AIG said that

some of these were bonuses promised employees from the previous year. Regardless, because

AIG received government money, the company had to answer to the American public. Citizens

were closely watching the financial decisions of AIG. This changed the working environment of

the company and impacted AIGs employees (Andrews, 2009).

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 Works Cited

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from http://www.aig.com/about-us_3171_437773.html

Andrews, E. L., & Baker, P. (2009, March 14). A.I.G. Planning Huge Bonuses After $170 Billion
Bailout. Retrieved March 02, 2016, from http://www.nytimes.com/2009/03/15/business/
15AIG.html?_r=0

Board of Governors of the Federal Reserve. (2008, October 8). Press Release. Retrieved
February 19, 2016, from http://www.federalreserve.gov/newsevents/press/other/
20081008a.htm

Board of Governors of the Federal Reserve. (2008, September 16). Press Release. Retrieved
February 19, 2016, from http://www.federalreserve.gov/newsevents/press/other/
20080916a.htm

Brady, D. (2009, Dec 30). The AIG e-mail trail; behind the public declarations of optimism in
2007, months of internal discord and doubt. The Washington Post Retrieved from http://
search.proquest.com/docview/410330989?accountid=25133

Canham, C. (2008, October 15). PricewaterhouseCoopers US agrees to $97.5m settlement.

Carney, J. (2012, December 11). Does The US Treasury Owe Capital Gains Taxes On AIG
Profits? Retrieved March 02, 2016, from http://www.cnbc.com/id/100302098

Cohn, M. (November 3, 2008). In brief. Accounting Today, Retrieved from www.lexisnexis.com/

Kiel, P. (2008, November 14). AIG's Spiral Downward: A Timeline. Retrieved March 02, 2016,
from https://www.propublica.org/article/article-aigs-downward-spiral-1114

Mollenkamp C., Ng S., Pleven L., & Smith R. (2008, Nov 03). Behind AIG's
fall, risk models failed to pass real-world test. Wall Street Journal Retrieved from
http://0-search.proquest.com.helin.uri.edu/docview/399115580?accountid=25133
Narrative Science. (2012, April 30). Forbes Earnings Preview: American International Group.
Retrieved February 19, 2016, from http://www.forbes.com/sites/narrativescience/
2012/04/30/forbes-earnings-preview-american-international-group-3/#320f8c6a62d8

Northwestern University. (2015, August 3). What Went Wrong at AIG? Retrieved March 02,
2016, from http://insight.kellogg.northwestern.edu/article/what-went-wrong-at-aig

Reuters. (2015, March 21). A.I.G. to Pay Nearly $1 Billion to Settle Class-Action Suit Brought
by Shareholders. Retrieved March 02, 2016, from http://www.nytimes.com/2015/03/22/
business/dealbook/aig-to-pay-nearly-1-billion-to-settle-class-action-suit-brought-by-
shareholders.html

Wall Street Journal. (2008, September 15). S&P Downgrades AIG. Retrieved March 02, 2016,
from http://www.wsj.com/wallstreetcrisis/2008/09/15/sp-downgrades-aig-citing-reduced-
flexibility/

Yahoo Finance. (2016, February 19). Historical Prices. Retrieved February 19, 2016, from
http://finance.yahoo.com/q/hp?s=AIG