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Financial Engineering: The Evolution of a Profession by Cara M. Marshall, Tanya Beder

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Chapter 22

Credit Derivatives Case Studies: AIG and Merrill Lynch

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CASE STUDY ONE: AMERICAN INTERNATIONAL GROUP (AIG)1

Event Summary

The U.S. Federal Reserve, under the guidance of the Treasury Department, took control of American International Group (AIG) with an $85 billion bailout on September 16, 2008. The rescue left the U.S. government holding 80 percent of the largest insurance company in the world until the company can be recapitalized. The recapitalization was expected to occur through a sale of the insurance company's assets. A significant portion of AIG's problems were attributed to credit derivative losses suffered by its financial products division. The firm was found to have taken on too much risk, and to have not had the resources to meet calls for additional collateral, when the value of reference collateralized debt obligations (CDOs) that it had insured started plummeting. New York State Attorney General Andrew Cuomo is investigating payouts the firm made to a series of counterparties who demanded additional collateral. AIG's disclosure statements involving the collateral calls are also being investigated.

AIG's underwriting businesses were deemed essentially healthy and believed to be of interest to a variety of possible acquirers. Hank Greenberg, the founder and former chief executive of AIG, was mentioned as a possible buyer for some of the company's assets. At least one pension fund sued AIG for “gross imprudent risk taking.”

Event ...

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