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Problem statement

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akgamer1973
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© © All Rights Reserved
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Janki Devi Memorial College

AAMDANI
THE FINANCE AND INVESTMENT CELL

Case Study Competition

For Queries Contact:


Prachi Gupta- 9911110771
Asmita Chaturvedi- 9560540377
Chakshu Sukhwal- 8278651155
Navya Sharma- 9599999890
The competition focuses on a specific problem statement related to a
particular company which went bankrupt during 2007-2008 financial
crisis, accompanied by relevant contextual information provided in
the document.

Participants will have to make the 7-8 slider (Including the intro page,
and appendix) deck on the case problem and answer the key
questions. The deck should not exceed 3 slides in any circumstance.

The naming convention should be: TeamName_AamdaniFIC , For e.x:


XYZ_AamdaniFIC.

All presentations must be submitted via the Unstop platform before


2:00 PM on October 13th, 2024.

Participants must not mention their college name anywhere in the


Presentation. Only Participants/Team name is allowed.

Any incomplete or plagiarized entries will be subject to


disqualification from the competition.

Participants should incorporate relevant financial evaluations. Refer


to the Evaluation Criteria at the end for more details.

Decision of Judges will be Final and Binding.


THE COLLAPSE OF AIG
BACKGROUND

American International Group (AIG), a global insurance company


with approximately $1 trillion in assets under control, American
International Group (AIG) was one of the biggest insurance
businesses in the world prior to the 2008 financial crisis. It was a
major participant in the global financial system due to its
enormous size and power. But beneath its imposing exterior, AIG
was heavily exposed to intricate and dangerous financial
instruments, especially credit default swaps (CDS). These financial
products had a strong connection to the unstable US housing
market at the time.
The value of the underlying assets AIG covered through CDS
contracts fell precipitously as the collapse of the U.S. housing
market started. When Lehman Brothers filed for bankruptcy in
September 2008, it sent a tremor across the financial industry
that swiftly reached AIG.
AIG was on the edge of bankruptcy when it revealed a startling
$99.2 billion in losses on September 16, 2008.The collapse of AIG
posed a risk to global financial stability in addition to being a
corporate problem. Because the financial markets are intertwined,
the failure of AIG posed a risk of a chain reaction that may collapse
several other financial firms. Sensing this, and in one of the biggest
government actions of the financial crisis, the U.S. Federal Reserve
stepped in with an emergency $85 billion loan to keep AIG afloat.
The extent of the systemic dangers involved was brought to light
by this bailout, which prevented AIG from going bankrupt with
Lehman Brothers.
The main cause of AIG's problems was its inadequate evaluation and
handling of the risks in its investment portfolio, especially given its
heavy reliance on risky financial instruments. When the market
plummeted, this, together with inadequate liquidity management,
prevented the corporation from meeting its obligations. The AIG
crisis, which highlighted the intricate nature of the global financial
system and the far-reaching effects of inadequate risk management,
turned into a pivotal point in the 2008 financial collapse.
This case study offers important insights into the consequences of
poorly managed risk, the value of liquidity, and the systemic risks
associated with sophisticated financial instruments in international
markets.
AIG was heavily involved in credit default swaps, which act as
insurance on bonds. AIG insured over $500 billion worth of assets,
including $78 billion in multi-sector collateralized debt obligations
(CDOs) that were particularly vulnerable to the real estate
downturn.
When AIG's credit rating was downgraded, it triggered collateral
calls, with AIG owing $32 billion overnight, leading to a liquidity
crisis. The company lacked offsetting positions that could have
reduced its exposure, making the CDS business particularly risky.
AIG also engaged in securities lending, where it lent securities in
exchange for cash collateral. Instead of investing this collateral in
safe assets, AIG invested in risky, long-term assets, many tied to
subprime mortgages.
As the value of these investments fell, borrowers demanded their
collateral back, which AIG could not provide due to its liquidity
issues, exacerbating its financial troubles.
AIG's executives claimed their investments were “money-good,” or
safe in the long run. However, deeper analysis revealed that the
underlying mortgage-backed securities were not as sound as initially
claimed. This misjudgment of asset quality meant that the crisis was
not just about liquidity but also about the fundamental riskiness of
AIG's investments.
QUESTIONS
1.What lessons can be learned from AIG's experience regarding the
systemic risks associated with complex financial instruments, and
how can these risks be addressed to prevent future financial crises?

2.What role did AIG's misjudgment of asset quality and liquidity


management failures play in its downfall, and how could a better
evaluation of its investment portfolio have altered the outcome?

3.During the 2008 financial crisis, AIG was bailed out with an $85
billion loan from the U.S. Federal Reserve, saving the company from
bankruptcy, unlike Lehman Brothers, which was allowed to fail. If AIG
had not received this bailout, and you were in a leadership position at
the company, what strategies would you have implemented to save
the company from collapse? Provide a detailed analysis of the steps
you would take to stabilize the company and manage the crisis.
Depth of Financial and Strategic Analysis
Participants should demonstrate a thorough understanding
through frameworks like SWOT, Risk Management Evaluation,
Scenario and Sensitivity Analysis (Assess how various factors
like housing market collapse or interest rate changes
affected AIG's financial outcomes. Sensitivity analysis can
reveal the impact of specific risks on the company's
performance), Ratio Analysis, etc. Insight into AIG’s financial
exposure, market risks, and regulatory environment is
essential.

Uniqueness and Practicality of Solutions


Proposed strategies must be both innovative and feasible,
addressing AIG’s risk management failures with practical
approaches. Solutions should focus on long-term financial
stability and realistic reform ideas to prevent future crises.

Strategic Alignment and Impact


Solutions should align with global financial regulations and
best practices, highlighting their potential to influence
broader market stability and improve AIG’s resilience in
future financial downturns.

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