Section 2 - FTSE

AIG’S BLANK
CHEQUE
What price saving a company from collapse? Like
other insurers, insurance giant American
International Group (AIG) has been thumped by
the severe downturn in the credit markets as fears
that the gamut of complex, structured
investments it insures will default. A 24 month
$85bn line of credit proved insufficient, an
additional $40bn did not help much, either.
However, with its latest relief package—more
flexible terms, more payoff time, and, yes, even
more money—the government believes it has
finally found the formula that will allow AIG the
most realistic chance of recovering from its
ruinous credit-related investment activities. Third
time lucky? David Simons reports from Boston.
THEY KNEW THE risks, watched as losses piled up,
but told auditors almost nothing. In an era of
increasingly tough oversight standards, they
routinely avoided regulatory independence and put the
kibosh on finger-pointing insiders. When the house of
cards finally fell last September, AIG—at one time the
single largest insurance entity in the world with
facilities in more than 130 countries—found itself
at the doorstep of the federal government, hat in
hand. The powers that be sized up the
situation, pronounced AIG “too big to fail,”
and proffered a generous credit line of
$85bn, but it was not enough.
By November 2008 the largest bailout
of a non-banking firm in the history of
the United States had swelled to over
$150bn, and included more favourable
terms than the initial package offered.
Not even that chunk of change could
guarantee a surefire recovery as long as
the company continued to go into the
hole in order to cover its toxic portfolio
of complex credit investments. These
included the super-senior tranches of
collateralised debt obligations (CDOs)
accumulated by AIG’s Financial
Products Corp subsidiary.
Photograph © Robert Mizerek/Dreamstime.com, supplied December 2008.
F T S E G L O B A L M A R K E T S • J A N U A R Y / F E B R U A R Y 2 0 0 9
By the end of November the company finally issued some
good news: some $53.5bn in mortgage debt obligations
would be cleared from AIG’s books, part of an agreement
with the federal government to purchase upwards $70bn
worth of toxic credit-based assets. AIG would continue to
be liable for assets not yet obtained, however.
The government contends that its course of action has
more to do with preventing the carnage from spreading
throughout the entire global financial community, rather
than sparing AIG itself. Even so, it is a tremendous gamble,
one with potentially enormous consequences. Should AIG
recover and its stock price rally, the government would turn
CORPORATE PROFILE: AIG
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