What went wrong at AIG?
Despite US$110 billion in annual sales and assets in excess of US$1 trillion, on the 16th of September 2008, AIG accepted the Federal Reserve’s US$85 billion rescue package in order to prevent itself from facing a Chapter 11 filing. In exchange, AIG had given a 79.9% stake in the company to the government and also the right to suspend dividends previously issued to common stock and preferred equity. In all, US$184 billion in shareholder value was wiped out in less than a year! This was the largest government bailout of a private company in US history. From a strategic management (i.e. strategic analyses) perspective, what mistakes have been made by AIG in the recent past? Most of the traditional businesses that AIG is involved in, like insurance, are actually doing quite well. However, this fallout can be traced to seeds planted years ago, under former CEO Mr. Maurice Greenberg. During his tenure, AIG became a global behemoth, expanding into many complex lines of business and insuring risk that few companies would touch. As a result, AIG began to go into business that they did not fully understand. As part of its strategy to diversify its investments, AIG began to invest in various types of securities, including credit derivatives and mortgage backed securities. Because of AIG’s excellent credit rating, it became a major player in these markets, insuring others’ debt obligations against losses. In 2007, AIG recorded a $5.5 billion writedown on its investments. Furthermore, AIG’s operating divisions held a total of $84.8 billion worth of investments in mortgage backed securities, about 10% of AIG’s total invested assets. As a result, they had a rather significant exposure to sub-prime related losses from their subsidiaries and mortgage related investments. A key factor was the difference between the credit default swap business as compared to their normal insurance business. For example, in home insurance, AIG would insure a large...
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