The Involvement of AIG's Default Swaps on the Financial Crisis

A financial crisis occurred during the years of 2006 – 2007. Overpowered by substandard financial markets, the crisis set a great depression and placed a great impact on many companies. Many financial institutions faced turmoil and difficulties during this time, including one AIG. The crisis lasted for several years, and some speculate that it is still not entirely over. The financial traumas that AIG experienced were exploited all across newspapers and media outlets, mainly because their risk management solutions can be blamed with the company’s quick downfall.

Credit Default Swaps and AIG

AIG was a company that was involved with CDS and the writing of it. This contract, protecting both the buyer and the seller, offers protection from the seller in the event of default of an underlying entity. In exchange for that protection the buyer pays a sum of the premium to the seller. It was after the housing market crash that AIG began facing their biggest mishaps. This was a time when more than $440 billion of fixed incomes were being managed by the company. When companies searched for CDS protection during the economical downfall they also sought payouts from AIG. It was these requests as well as increased requirements for insurance standards that caused AIGs pitfall.

Not Enough to Cover it All

Because of the substantial amount of the payouts that were requested, AIG suffered greatly and faced a crunch of their liquidations. They did not have the available cash to pay these claims this it was necessary for the liquidation to occur. This damaged the reputation of AIG greatly. What was once a well-known company was now considered to be on a downfall. A $180 million bailout was needed, and AIG, in the end, come through and remained in business. This was with the help of government money and sources, however, as well as many changes within the AIG organization.

Conclusion

The economic impacts that were experienced were felt by a large number of people of all backgrounds. This includes big names such as AIG. They, too, suffered, and it was, perhaps bad planning and strategies, combined with the wrong timing, that caused their bailout. They survived, however, and continue to serve the needs of their customers through a variety of insurance policies and packages that are still available. Financially they have been able to begin the road of recovery and are back on the right tracks.