Scribd
Upload
123 views

Aig

AIG failed and required a government bailout due to risky investments that it was able to make without proper regulation or oversight. AIG sold credit default swaps worth $70 billion to insure subprime mortgage securities without having sufficient funds to pay out if the assets defaulted. This lack of oversight was due to AIG's political influence which allowed it to avoid regulation. Additionally, AIG's compensation structure incentivized risky behavior by executives. To prevent future failures, AIG could have limited risky investments through improved regulation and transparency around its portfolio and business practices.

Uploaded by

Nadzripolice Otai
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as ODT, PDF, TXT or read online on Scribd
123 views

Aig

AIG failed and required a government bailout due to risky investments that it was able to make without proper regulation or oversight. AIG sold credit default swaps worth $70 billion to insure subprime mortgage securities without having sufficient funds to pay out if the assets defaulted. This lack of oversight was due to AIG's political influence which allowed it to avoid regulation. Additionally, AIG's compensation structure incentivized risky behavior by executives. To prevent future failures, AIG could have limited risky investments through improved regulation and transparency around its portfolio and business practices.

Uploaded by

Nadzripolice Otai
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as ODT, PDF, TXT or read online on Scribd
You are on page 1/ 2

What could AIG have done differently to prevent its failure and susequent bailout?

bailout definition A definition for a bailout could be any government-sponsored delay in the exit of insolvent banks or institution that is explicitly or implicitly funded by public resources. Also, bailouts could consist of capital injections or purchase of shares in firms or assets from financial institutions Case Backgournd AIG is an insurance company based in the United States with headquarters all around the world. Among the types of insurance offered by AIG, there are also the CDSs (Credit Default Swaps). CDSs are a type of insurance that protects an investment bank, or any institution that lends money, against the risk of a credit default, which occurs when the borrower is unable to pay its debt Until 2008, AIG wrote insurance against subprime mortgage-backed securities worth roughly $70 billion, but the market crashed in 2008 and AIG had to pay the companies it had provided insurance to (Muolo, 2009, p.12-13). Since the insurance company was unable to pay the debt, the US government decided to bail it out. AIG received a rescue package $150 billion from the Federal Reserve until November 2008. This was followed up by an additional $30 billion in March 2009 . CAUSES OF AIG FAILURE Many factors led to the ultimate takeover of American International Group (AIG) by the U.S. Federal Reserve in September 2008. among the factors:

AIG was able to engage in risky business for so long because Washington looked the other way. The company befriended politicians with campaign contributions, escaping regulation that might have prevented the current crisis Howard Sosin founded AIG FP in 1987, and remained there until 1993. When he was first hired, he was offered a 20 percent stake in the Financial Product unit and 20 percent of its profits. While many hedge fund managers receive this type of incentive program, this a conflict of interest . This causes a manager to throw caution to the wind in order to make a profit. Understanding that the higher the risk, the higher the expected return, Sosin was given almost free reign. The level of credit risk that AIG insured by selling credit default swaps (CDS) was far beyond what it could tolerate. The company mismanaged CDS selling because it failed to plan for what would happen if the assets protected by the swaps would default on a large scale

What could AIG have done differently to prevent its failure AIG Policies and Regulation That Limit risky investments The main issue that was identified as cause of these events was the lack of regulation for financial institutions. AIG top management were allowed to carry on with risky investments since there were no limitations on company portfolios. Regulation is important in the sense that it reduces risk taking which causes systemic failure. There are ways in which regulators/board of director/share holder/goverment can reduce market instability and prevent excessive risk taking by AIG.
Improve staff transparency and improve communication chanel Transparency is Essential Without transparency, as in AIG case, there is miscommunication, scandal and inefficiency, which ultimately impacts the entire chain. Improve staff transparency and improve communication chanel can be improve by reward system, human resourse program such as trainning for

new worker.

You might also like