AIG

Definition

AIG, or American International Group, is a global insurance and financial services company that gained notoriety during the 2008 financial crisis due to its significant role in the collapse of the housing market. The company was heavily involved in issuing credit default swaps, which contributed to the severe risks in the financial system, ultimately leading to its near failure and requiring a government bailout.

5 Must Know Facts For Your Next Test

1. AIG was one of the largest issuers of credit default swaps, providing insurance against defaults on various financial products, particularly mortgage-backed securities.
2. The collapse of the housing market led to massive losses for AIG, as homeowners defaulted on their mortgages, triggering claims on the credit default swaps.
3. In September 2008, AIG received a bailout worth $182 billion from the U.S. government, making it one of the largest rescues in American history.
4. The fallout from AIG's near-collapse raised concerns about systemic risk within the financial system and led to significant regulatory changes aimed at preventing future crises.
5. AIG's involvement in high-risk financial practices highlighted the interconnectedness of financial institutions and how risks can spread rapidly throughout the economy.

Review Questions

• How did AIG's business practices contribute to the financial crisis, particularly regarding its use of credit default swaps?
  • AIG's involvement in issuing credit default swaps played a pivotal role in amplifying risks during the financial crisis. By providing insurance on mortgage-backed securities without sufficient capital reserves, AIG exposed itself to massive potential losses. When the housing market collapsed and homeowners began defaulting on their loans, AIG faced overwhelming claims that it could not cover, leading to its near failure and subsequent government intervention.
• Analyze the implications of AIG's bailout for the broader financial system and regulatory landscape post-crisis.
  • The bailout of AIG had profound implications for both the financial system and future regulatory measures. It highlighted how interconnected large financial institutions were and raised concerns about 'too big to fail' entities. In response, regulatory reforms such as the Dodd-Frank Act were implemented to increase oversight and reduce systemic risk, aiming to ensure that no single institution could threaten the entire financial system's stability again.
• Evaluate the long-term effects of AIG's actions during the financial crisis on public trust in financial institutions and government interventions.
  • AIG's actions during the financial crisis significantly eroded public trust in both financial institutions and government interventions. Many viewed the bailout as a reward for reckless behavior, leading to widespread outrage among taxpayers who felt their money was used to save a failing company. This distrust continues to influence public perception and policy discussions around financial regulation and corporate accountability, emphasizing the need for greater transparency and responsible practices within the industry.

Related terms

Credit Default Swap: A financial derivative that allows an investor to 'swap' or transfer the credit risk of a borrower to another party, often used by AIG to insure against defaults on mortgage-backed securities.

Mortgage-Backed Securities: Financial instruments backed by a pool of mortgages, which AIG insured through credit default swaps, playing a critical role in the financial crisis.

Bailout: Financial assistance provided by the government to prevent a company from failing, as seen with AIG when it received substantial funds to stabilize the company during the crisis.