Introduction
There was a period of extreme economic suffering in the fall of 2008, which was characterized by a general downturn in housing prices, an increase in default rates and seizures, and a sharp decline in the value of home loan securities and other associated instruments. IndyMac Bank and Lehman Brothers, two significant institutions, suffered crippling losses that ultimately caused their collapse. The government placed Fannie Mae and Freddie Mac under its conservatorship. The U.S. and international financial markets were experiencing a progressive loss of trust, and the credit markets were essentially frozen. American International Group (AIG) is one of such extreme downturn.
Millions of Americans, who considered money market funds to be a secure investment, were making large numbers of withdrawals. The commercial paper market, a crucial source of capital for American businesses, was severely affected as a result of the run on these funds. Markets for securitization began to freeze up, particularly those that depended on products backed by personal loans. Bank lending was severely reduced leading to a complete state of panic.
American International Group (AIG) – the largest insurance business in the world, was experiencing serious liquidity issues. This happened particularly due to losses on its mortgage-related stock portfolio and collateral calls on credit default swaps (CDS) and other financial derivatives. The company was on the verge of collapsing, by mid-September 2008, due to these cash concerns. By September 15 of the same year, certain credit rating agencies’ downgrades resulted in collateral calls for CDS that the company couldn’t fulfill. The collapse of the massive insurance company was one of the worst financial catastrophes of the 2000s.
American International Group Business Profile
American International Group is an American multinational insurance and financial company that currently operates in 130+ states. The business has its operations all around the world with its headquarters in New York City. Comelius Vandar Starr created this public firm as an American Asiatic Underwriters in Shanghai, China in 1919 AD. It later changed its name to American International Underwriters and adopted its current name, “American Insurance Group,” in 1967 AD.
Within 2 years, Starr established a life insurance firm after which the company quickly experienced tremendous growth. The business, which was gradually expanding, has operations in numerous Latin American nations as well as China, Southeast Asia, Philippines, Indonesia, and Malaysia. AIG saw its first business decline during the years leading up to World War II. In 1939, just before World War II started, AIU relocated its headquarters from Shanghai to New York. They entered Germany and Japan after the world war to provide insurance for American military troops. Later, they spread across all of Europe. In the 1950s, AIG started concentrating on the American Market in order to expand its business.
American International Group and the downfall
In September 2003, the SEC charged the insurance company with selling fake policies in order to enable it to give the public inaccurate and misleading financial statistics. As a part of the resolution for this case, AIG paid a civil penalty of $10 million.
Again in November 2004, SEC sued AIG with securities fraud for creating, selling, and engaging in transactions that allowed other public companies to eliminate their troubling and underperforming debts off of its financial statement. AIG agreed to pay $126 million in disgorgement and penalties to resolve the case after it was found guilty of the criminal allegations brought against it. The company was always under the radar of the SEC due to its unethical practices. The SEC, Justice Department, and New York Attorney General’s office allegedly caught AIG in fraud again in 2005. An independent counsel looked into things at the AIG audit committee’s request. The company had to show its financial records from the past five years, but was unable to do so in the allotted time.
As part of the ongoing investigation into corruption in the insurance business, the Attorney’s Office and the Insurance Division started looking into allegations of bid rigging against AIG in late 2004. They discovered grave errors resulting in the SEC jointly launching an investigation. They later discovered that AIG’s accounts contained fictitious transactions. GRC provided assistance to AIG in the form of phony transfers for loss reserves in late 2000 and early 2001. This way, the business was able to conceal its losses and inflate its financial statements.
AIG and Allegation
As per the investigation, the following allegations were made against the insurance firm;
- AIG materially falsified its financial statements through a variety of sham transactions and entities whose purpose was to paint a falsely rosy picture of AIG’s financial results to analysts and investors.
- AIG structured two sham reinsurance transactions with General Re Corporation (Gen Re) to add a total of $500 million in phony loss reserves to AIG’s balance sheet in the fourth quarter of 2000 and the first quarter in 2001.
- Security and Exchange Commission (SEC) charged AIG with securities fraud for fashioning and selling a sham “insurance” product to Brightpoint, Inc. for the sole purpose of enabling Brightpoint to report false and misleading financial information to the public.
- Security and Exchange Commission (SEC) charged AIG with securities fraud for developing, marketing, and entering into transactions that enabled another public company, PNC Financial Services Group, In., to remove fraudulently certain volatile, troubled, or underperforming loans and other assets from its balance sheet.
The district court of the Southern District of New York found the company guilty of all allegations. The SEC claimed that between 2000 and 2005, AIG fabricated its financial statements using a number of fictitious transactions to present analysts with a falsely optimistic view of the company’s financial performance. With GRC, it restructured two fraudulent transactions, adding a combined $500 million to AIG’s loss accounts. AIG issued their stocks in a stock-for-stock commercial purchase during the fraud period.
Based on the aforementioned actions, AIG’s infractions ensured that it participated in methods and conduct of business that comprised violations of numerous sections of the Securities Act of 1933 and the Exchange Act of 1934. The SEC asked the court in its complaint for a restraining order against AIG’s conduct as they were breaking the law for so long. In accordance with the transactions, conduct, practices, and course of business, AIG used mails or other tools and methods of interstate commerce. Furthermore, AIG deliberately altered the documents pertaining to the company’s accounts while evading the internal accounting system.
American International Group Accounting Scandal and Impact on Economy
However, as AIG had been the biggest company in its field for many years, its impact on the economy was very high. Hence, the New York Fed and the Board of Governors of the Federal Reserve System decided to intervene to stop the impending collapse of AIG, working closely with the U.S. Department of the Treasury. The decision to finance AIG was made with the objective of protecting the American people, the U.S. economy, and the world economy from the catastrophic consequences of the company’s collapse based on the economic scenario at that time.
There may have been serious repercussions and ramifications if AIG had really been allowed to collapse and the parent firm had declared bankruptcy. The state and international regulators of many of AIG’s insurance divisions might have taken control of those companies, leaving policyholders with questions regarding their rights and claims. An immediate halt to claims and withdrawal and potential long-term damage to those claims would have resulted from the seizure of AIG subsidiaries.
The company would have a hard time meeting its responsibilities to thousands of policyholders since it would have resulted in a widespread cashing-out of insurance programs and annuities. An already challenging and worsening municipal budget scenario would have exposed local and state government bodies, which borrowed investment funds from AIG. Workers, who had obtained 401(k) plans from AIG in the form of steady contracts, would lose their insurance. There would be significant losses in participants’ portfolios due to large losses caused by the compulsory write-down of AIG-related assets.
Since millions of Americans trust their assets in long term funds, the ensuing losses to these funds might have had disastrous consequences on their confidence and accelerated the run on different financial institutions. Worldwide commercial banks and investment banks would have experienced losses on loans and lines of credit to AIG as well as on contracts and other transactions, potentially putting even more restrictions on how much credit is available to individuals and businesses. There would be a significant decrease in consumer trust on other insurance companies.
Some of the impacts of AIG collapse are:
- A World Wide Recession
- Unemployment Rising
- How Owners Falling
- Falling Housing Market
- Falling Stock Market
- Falling Interest Rates
- Uncertainty in the Financial Markets
Conclusion
In conclusion, AIG’s failure was directly related to its attempt to mislead investors about the company’s financial standing by hiding their losses. If we look at the actual repercussions, the USA’s entire economy suffered. An organization the size of AIG has a significant impact on the development of the national economy, and a failure of this magnitude at the institutional level seriously undermines the development of the country.
According to U.S. government data, AIG was a business that was too big to fail. It also received a $85 billion federal loan to help it recover. An organization will always find it challenging to regain its position if it experiences a setback of this magnitude because they’ll have a hard time restoring the public’s trust. Whatever the issue, we can undoubtedly come to the conclusion that AIG’s role in the financial meltdown was essential for the global economy. The corporation continues to fight to regain its former leading position in the market. It will regain if the government’s intervention will treat the injury or only act as a bandage.
References
