US Financial Crisis: The Bailout of AIG


Code : ECC0018

Year :

Industry : Banking, Insurance and Financial Services

Region : Global

Teaching Note: Available

Structured Assignment : Available

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Abstract: The growth of subprime mortgage market resulted in development of numerous financial instruments meant to diversify the risk which were grossly incomprehensible. The alphabet soup of financial derivatives is largely blamed for the US Financial Crisis and AIG, for its part insured all the instruments without even evaluating the risk. The case attempts to explain the concept of Credit Default Swaps (CDS) and examine the role of American International Group (AIG) in the subprime context. The case also describes how these instruments were insured by AIG, making the buyers of the instruments believe that they bear no risk at all. When the disguise was revealed, AIG was forced to pay for all their worth. The risk at AIG resulted into a huge $441 billion worth of CDS, which brought the company to the brink of bankruptcy. The company could not fund all the risk and the bubble built around these instruments burst into a global financial crisis.

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Pedagogical Objectives:

  • To analyse how AIG's business strategies have transformed it into a leading insurer during the 20th century
  • To understand the effects of expansion of subprime market on insurance companies
  • To understand how financial institutions spread the risk from one to another
  • To analyse the causes of burst of housing bubble and its effect on AIG.

    Keywords : Financial Crisis, Subprime, AIG, Bailout, CDS, MBS, Investment Bank, Federal Reserve, Insurance, Portfolio, Financial Derivatives, Henry Paulson, AIGFP, Super senior CDS portfolio

    Contents :
    History of AIG
    Spread of Global Financial Virus
    Role of AIG in Subprime Crisis
    Collapse of Subprime Market: Its Effect on AIG

    Case Introduction >>

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