Essay on The Aig Bailout

22340 Words Dec 25th, 2011 90 Pages
The AIG Bailout
William K. Sjostrom, Jr.∗

Abstract On February 28, 2008, American International Group, Inc., the then largest insurance company in the United States, announced 2007 earnings of $6.20 billion or $2.39 per share. Its stock closed that day at $50.15 per share. Less than seven months later, however, AIG was on the verge of bankruptcy and had to be rescued by the United States government through an $85 billion loan. Government aid has since grown to $182.5 billion, and AIG’s stock recently traded at less than $1.00 per share. The Article explains why AIG, a company with $1 trillion in assets and $95.8 billion in shareholders’ equity, suddenly collapsed. It then details the terms of the government bailout, explores why it was
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Part II provides a brief overview of AIG’s operations, a primer on CDSs, and analysis of AIG’s CDS activities. Part III explains how AIG’s CDS business pushed it to the brink of bankruptcy by draining it of cash. Part IV details the terms of the government bailout (including its two restructurings), explores why it was undertaken, and questions its necessity. Part V describes the regulatory gap exploited by AIG and offers some thoughts on regulatory reform. II. AIG’s Operations A. Overview AIG is "a holding company which, through its subsidiaries, is engaged in a broad range of insurance and insurance-related activities in the United States and abroad."8 It is incorporated in Delaware,9 and its common stock is listed on the New York Stock Exchange.10 AIG has operations in more than 130 countries with about half of its revenues derived from its foreign operations.11
4. Infra Parts III & IV. 5. Infra Part IV.E. 6. Yahoo! Finance, supra note 3. 7. Infra Part III.A. 8. AIG, 2007 Annual Report (Form 10-K), at 3 (Feb. 27, 2008) [hereinafter AIG ‘07 Annual Report], available at http://idea.sec.gov/Archives/edgar/data/5272/000095012308 002280/y44393e10vk.htm. 9. Id. 10. Id. at 26. 11. Moody’s Investors Service, Company Profile: American International Group, Inc. 1

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Its principal business units are General Insurance, Life

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