AIG

Definition

American International Group (AIG) is a multinational insurance corporation that became one of the largest recipients of government assistance during the 2008 financial crisis. Known for its involvement in various insurance and financial services, AIG's near-collapse was primarily due to its exposure to risky financial products, particularly credit default swaps, which ultimately led to a significant government bailout to prevent systemic risk in the economy.

5 Must Know Facts For Your Next Test

1. AIG received a total of $182 billion in government assistance, which included loans, credit lines, and capital injections, making it one of the largest bailouts in U.S. history.
2. The bailout of AIG was controversial and sparked widespread public outrage, as it was perceived that taxpayer money was being used to rescue a company that had engaged in risky practices.
3. To repay the government, AIG sold off many of its assets and underwent significant restructuring after the bailout.
4. The AIG crisis highlighted the interconnectedness of financial institutions, as its failure could have led to a complete collapse of the global financial system.
5. As part of the bailout conditions, AIG had to implement stricter regulations and oversight on its business operations to ensure accountability and prevent future risks.

Review Questions

• How did AIG's business practices contribute to its near-collapse during the financial crisis?
  • AIG's near-collapse was primarily due to its extensive involvement in high-risk financial products like credit default swaps. These derivatives allowed AIG to insure against defaults on mortgage-backed securities without holding sufficient capital reserves. When the housing market crashed and defaults surged, AIG faced massive liabilities it could not cover, leading to its urgent need for a government bailout.
• Discuss the implications of AIG's bailout for the broader financial system and public perception of government intervention in markets.
  • The bailout of AIG had significant implications for the financial system as it underscored the concept of 'too big to fail.' The government’s intervention aimed to stabilize the economy and prevent a cascading failure of interconnected institutions. However, this intervention also led to widespread public outrage, as many viewed it as an example of protecting wealthy corporations at the expense of taxpayers, raising questions about moral hazard and accountability in financial practices.
• Evaluate the long-term effects of AIG's bailout on regulatory practices in the financial industry.
  • The long-term effects of AIG's bailout significantly influenced regulatory reforms in the financial industry, leading to stronger oversight and tighter regulations on derivatives trading. The Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in response to the crisis, aiming to enhance transparency and reduce risks associated with complex financial products. This shift aimed not only to prevent future crises but also to restore public trust in the financial system by promoting accountability among large institutions like AIG.

Related terms

Bailout: Financial support given to a company or country which faces serious financial difficulty or bankruptcy.

Credit Default Swap: A financial derivative that allows an investor to 'swap' or offset their credit risk with that of another investor.

Financial Crisis of 2008: A severe worldwide economic crisis that occurred in the early 21st century, triggered by the collapse of large financial institutions due to exposure to subprime mortgages.