Major Losses in 2008, Research Paper Example

AIG is the worlds largest and the most powerful insurance company, with estimated $900 billions in assets. This company seems to have suffered the greatest among the other American financial institutions. In fact, the company has been experiencing problems starting with 2007, as the damage done by the Katrina hurricane was to be mostly compensated by this insurer. This was the first sign that the large, aging company is hardly capable to keep up with the time. Most of the property in the New Orleans was insured at AIG, which made the giant unprofitable in 2006. In 2007 AIG posted losses of $5 billion.

However, these losses turned out to be insignificant compared with the report published in March 2009. Most of the banks that experienced problems with liquidity in 2008 guaranteed their deposits at AIG. Moreover, in order to reach greater profits this company held significant sums of money in profitable assets of the investments banks, most of which turned out to be toxic assets. In the first quarter of 2009 AIG reported a record loss of $61 billion (The Economist), which set the entire stock market in panic.

The US government assumed that AIG is simply too large to fail. Indeed, bankruptcy of such a company would destroy any confidence in the US financial market for decades. In order to save the giant, the government provided it with $85 billion in return for 79,9% of the shares. This allowed the company to keep operating, and the CEO appointed by the state took control. This bailout, however, seemed not be enough and further actions had to be taken. $34,5 billion debt of the company was cancelled in return for the majority stakes in AIG’s two most profitable subsidiaries: American International Assurance and American Life Insurance. Overall, abut $165 billions of the taxpayer’s money has been injected into the company to keep it afloat. Surprisingly, AIG still thought it was appropriate too award its managers with over $150 worth of bonuses. This money is clearly to be paid directly from the cash received as a bailout. Such inappropriate use of the government money is now a discussion question in one of the Congress committees.

References

“In a state” – The Economist published March 2, 2009, retrieved May 24, 2009 from: http://www.economist.com/finance/displaystory.cfm?story_id=13213322

Reich, Robert B. “AIG Bonuses Scandal: CEOs Take Our Billions and Are Accountable to No One” retrieved May 24, 2009 from:            http://www.alternet.org/workplace/131721/aig_bonuses_scandal:_ceos_take_our_billions_and_are_accountable_to_no_one/

Holm, E. “AIG’s Losses Lead Insurers as Tally Nears $1 Trillion” Bloomberg.com, retrieved May 24, 2009 at: http://www.bloomberg.com/apps/news?pid=20601110&sid=aqaXBx8Ogdxw