Design Highlights
- AIG’s past vulnerabilities during the financial crisis raise concerns about its current risk management practices and strategies.
- The insurer’s decision to increase its risk profile suggests a potential disregard for lessons learned from the $182 billion bailout.
- Despite core insurance units being solvent during the crisis, AIG’s aggressive investment strategies could jeopardize its stability.
- The company’s shift from high-interest loans to preferred equity in the bailout reflects an evolving approach to financial risk.
- Observers worry that AIG’s current operational decisions may threaten its long-term sustainability and recovery from federal control.
In a world where the largest U.S. insurer teetered on the brink of collapse, AIG’s saga stands out like a neon sign in a blackout. Back in 2007, AIG was riding high—$1 trillion in assets, $95.8 billion in shareholders’ equity, and a stock price that made investors feel warm and fuzzy. They were the kings of insurance, flaunting a global presence and a hefty portfolio of life, health, and property-casualty insurance.
But then the housing market crashed, and AIG’s house of cards came tumbling down. The culprit? A staggering $526 billion portfolio of credit default swaps (CDS). They were knee-deep in subprime mortgages—talk about a bad date. As asset values plummeted, so did AIG’s confidence in their risk management. Collateral calls came like an angry mob, draining liquidity faster than a leaky faucet, and suddenly, they were on the verge of bankruptcy.
It wasn’t even that their core insurance subsidiaries were insolvent, but the panic was real. Ratings agencies had a field day downgrading AIG, which only added fuel to the fire. Enter the Federal Reserve, like a superhero swooping in to save the day. In September 2008, they extended an $85 billion loan to keep AIG from falling off the cliff.
This was just the beginning. By the time the dust settled, taxpayer money had reached a staggering $182 billion. Yes, that’s billion with a ‘B.’ The terms were rough—79.9% equity stake for the government. It felt more like a hostile takeover than a rescue. But wait, there’s more! Over the next few years, the bailout evolved.
The Fed restructured support, swapping out high-interest loans for preferred equity and other financial instruments. They even created special purpose vehicles to buy up mortgage-related assets. AIG started selling off pieces of its empire, unloading stakes in companies like AIA and ALICO to repay the government. The timeline stretched, but eventually, AIG managed to crawl out from under the government’s thumb. AIG’s near-collapse highlighted vulnerabilities in financial systems linked to mortgage markets.
Fast forward to today, and the insurer is once again raising its risk profile. It’s almost like they didn’t learn their lesson. Sure, they’ve been through a lot, but the ghosts of the past linger. With a history like that, one might wonder if they’ll ever play it safe again. The company’s total assets were valued at $1 trillion only time will tell if AIG can navigate these waters without capsizing once more.
