Aig Bailout Essay

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AIGFP was treated independently from its parent company, it had to report only "the results
of their retrospective operations". (Vasudev, 2009) Therefore, it is possible, that the AIG
management was not aware of all AIGFP actions and risks. In the year of 2002, AIGFP had no
payment obligations and its capital market operations generated a profit of $890 million (15% of
AIG's total net income). The following two years' disclosures were very similar. Originally, AIG
announced a profit of $1,086 million in 2003. In both years they did not mention any payment
obligations and praised their Capital Market unit as AIG's driver for growth in operating income. The
most successful year was 2005. With a profit of $2.66 billion, the unit presented 25% of AIG's total
income. In 2006, AIG apparently concealed details or payment obligations in its annual report even
though the Capital Market unit declared a loss of $873 million. In all these five years, risk in general
was no issue in AIG disclosures. Finally, in 2007 AIG had to report a loss of $11.5 billion, mainly
caused by the default swap business. Though, in its annual report AIG did not expect these losses to
affect the financial condition of the company as the management continued to "believe that AIGFP
will not realize significant losses from this derivative business (...). Since its creation, AIGFP has been
a strong performer and is an important component of AIG's diverse portfolio of businesses." They
were certain that the losses of 2007 were just an exception and would not recur in the future.
(Vasudev 2009)
The bailout itself took place in September 2008. On Friday, September 12, AIG needed $9 billion in
cash to meet its liabilities. The AIG corporate itself held $1 trillion in assets, but due to regulatory
constraints (money was held by subsidiaries) it could not use this money. Furthermore, it faced
demands for collateral in the amount of $23.4 billion. At this point, the rating agencies warned...

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