The Aig Bailout

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  • Topic: Collateralized debt obligation, Credit default swap, Credit risk
  • Pages : 60 (22329 words )
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  • Published : December 14, 2011
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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 undertaken, and questions its necessity. Finally, the Article describes the regulatory gap exploited by AIG and offers some thoughts on regulatory reform. Table of Contents I. Introduction .................................................................................. 944 II. AIG’s Operations.......................................................................... 945 A. Overview ............................................................................... 945 B. Credit Default Swap Primer................................................... 947 C. AIG’s Credit Default Swap Business .................................... 952 III. AIG’s Collapse ............................................................................. 959 A. Credit Default Swaps on Multi-Sector Collateralized Debt Obligations .................................................................... 959 B. Securities Lending Program................................................... 961 ∗ Professor of Law, University of Arizona James E. Rogers College of Law. I would like to thank Professors Steven Davidoff, Michael Guttentag, Lee Harris, Darian Ibrahim, and David Zaring and workshop participants at Salmon P. Chase College of Law, Northern Kentucky University; McGeorge School of Law; and the University of Memphis Cecil C. Humphreys School of Law for helpful comments on earlier versions of this Article.

943

944

66 WASH. & LEE L. REV. 943 (2009) C. Inability to Access Capital Markets and Credit Downgrade ............................................................................ 962

IV. The Bailout ................................................................................... 963 A. Initial Bailout ......................................................................... 964 B. Additional Lifelines ............................................................... 968 C. Bailout Restructuring I .......................................................... 969 D. Bailout Restructuring II ......................................................... 972 E. Grand Total............................................................................ 974 F. Legal Issues ........................................................................... 976 G. Why the Bailout? ................................................................... 977 V. The (Lack of) Regulation of Credit Default Swaps ...................... 983 A. Regulatory Gap ...................................................................... 983 B. Regulatory Reform ................................................................ 989 VI. Conclusion .................................................................................... 990

I. Introduction On February 28, 2008, American International Group, Inc. (AIG), then the largest insurance company in the United States,1 announced 2007 earnings of $6.20 billion or $2.39 per share.2 Its stock closed that day at $50.15 per share.3 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

1. Based on net premiums underwritten, AIG was the largest life insurer, the largest health insurer, and the second largest property...
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