The American International Group, AIG, almost went bankrupt in 2008. The cause as to why they failed was never fully discovered, but there are many hypotheses as to why it happened. The biggest reason researchers think AIG failed was because they owed a lot of collateral to their credit default swap partners. AIG was making deals with these credit default swap partners and in trading of loans, they eventually had to pay them money. However, AIG did not think they would ever have to pay the money because AIG only had to pay the money back to the credit default swap partners if their credit rating level went below a certain level. AIG trusted their credit rating level not to get below a certain point, but eventually, it did and AIG had to pay collateral, that they didn't have, to their credit default swap partners.AIG was so connected among American companies that if it collapsed it would bring down other major investing companies. Therefore, the government decided to bail out AIG with a $85 billion two-year loan. Also, the government took 75% of the company and was able to veto any important decisions made by the new members of AIG management. AIG paid $165 million in bonuses to its executives after receiving the loan. Many people were angered at this and even sent death threats to the executive. Finally, the US Treasury Department, in 2012, sold all of its shares of AIG and made a $22.7 billion profit.
4 comments:
Very cool! I've never quite seen the government intervene so much in the economy before. The stimulus and bailouts of 08 seemed to be quite effective.
The degree to which the government became involved in the company was very interesting to see because they actually had the ability to veto decisions made by leaders at AIG.
Does anything like this still happen today with large corporations? It is kind of freaky to think companies may still be doing this today all on the basis that credit ratings will never go down enough for them to pay up.
What irks me the most about the situations is that tax payers suffered to supply the money for the bailout and AIG used the money to give a total of 165 million dollars in bonuses to their employees.
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