Raihaan Darr
Prof. James Bush
Finance 305 A
12/14/2014
THE BAILOUT OF AIG
Overview
In September 2008, American International Group, Inc. (AIG) – one of the largest
international companies in the world, received an extension of credit from the Federal
Reserve to preserve the stability of a currently existing crippled U.S. economy with the
sole purpose to protect U.S. taxpayers from the shameful consequence of disorderly
failure. On the morning of September 16th, 2016 the bailout of AIG began and their stop
plummeted 60% at the opening of the New York Stock Exchange. This was a result of a
$441 billion exposure to credit default swaps. From the severity of the crisis, together
the U.S. Department of Treasury and the New York Federal Reserve Banks worked
alongside AIG for the stabilization of the company with the hopeful goal that it would no
longer poses a systematic risk and for the security of payments of the U.S. taxpayer’s
assistance.
Three years later, on January 14, 2011, the assistance from the New York Fed to AIG
was terminated and the loan was fully repaid. The exit of the NY Federal Reserve Bank
was a part of a comprehensive recapitalization announced in 2010 in September. On
January 14, 2011 it was closed by the Treasury Department, New York Fed, The AIG
Credit Facility Trust and lastly AIG themselves. The overall recapitalization brought light
to the progress made which assisted in the reduction of the risk, scope and the overall
complexity of their operations and the stabilization of their operating results which was
designed to expedite the AIG’s obligated repayments to the people of America.
In 2012, on the last day of February, and on August 23rd in the same year, the last
securities purchased as a part of the Federal Reserve assistance to AIG was sold by
Maiden Lane 11 LLC & Maiden Lane III LLC. Combined together, the total repayment
amount to both LLCs totaled a net gain of $9.4 billion for the benefit of the U.S. public.
There was also $1.3 billon paid to the New York Fed for loan interest.
Background
The demise of 2008 brought upon a deplorable economical state and a domino effect of
destruction starting with a wide range in the decrescendo-like direction in the valuation
of mortgage-backed securities, rise in foreclosures and in delinquencies, and the fall in
the price of homes. Institutions such as the Lehman Brothers and IndyMac bank were
stricken with a devastating blow with the losses of billions of dollars which catapulted
their collapse. Freddie Mac and Fannie Mae become government conservatorships.
From this brought doubt in the strength of the U.S. and global markets while the credit
markets were at a standstill which were revered as a safe investment to a large number
of Americans, these money markets were witnessing drastic withdrawals. The hit to
these funds tore apart the commercial paper markets which were at the time an
important source of American business funding. Securities markets began seizing up,
most importantly the ones that relied on instruments that were backed by consumer
loans. Banks took major precaution and lessened the amount of lending amidst a
financial panic that was spreading ever so fast. The effect of the crisis stretched far
beyond the streets and sidewalks of Wall Street. This was stretching into a global
epidemic. State governments were staring down the list of budget shortages for school,
hospitals, small and large business. Elimination of pre-secured jobs were now leaving
millions without work and provision for family security.
At the time, AIG was the world’s largest insurance company and heavily vested in the
global trading of derivatives and other financial instruments. They were facing a major
liquidity crisis. This came as a result of collateral calls on credit default swaps, the loss
of their mortgage-related investment portfolio and amongst other financial contracts. By
the middle of September of 2008, the pressure rising from the liquidity dilemma was
