What’s Happened to AIG?
For AIG, a company that made so much commotion at the end of 2008 and beginning of 2009, it’s kind of strange that it hasn’t made as much as a cricket’s chirp as of late. The insurance giant holds a significant place in history as one of the companies responsible for costing taxpayers billions in bailout funds. But since the company somehow steered its way out of the spotlight not long after this major issue, let’s take a look at where it has been and what it’s been up to in 2010.
AIG’s Big Fall
Not many people saw it coming. Who knew that American International Group, one of the biggest insurance agencies in the world, could ever be vulnerable to bankruptcy? But it was. It fell victim (of course, this is putting it nicely) to what many other companies did – bet on real estate. More specifically, it wrote CDS’s to back CDO’s and they both failed.
What are CDSs and CDOs? CDSs are also known as credit default swaps, or insurance guarantees that cover bonds if they default. In this case, the credit default swaps were covering CDOs (collateralized debt obligations), which are defined as securities backed by a pool of bonds, loans and other assets.
The CDOs AIG was covering were back mostly by subprime mortgages – you know, the majority of adjustable rate mortgages that many borrowers could not pay off because they didn’t have the money to cover the increase in their monthly payment that occurred when their rate adjusted? This meant that AIG had insured billions in CDS’s backed by a market on the verge of collapse.
And that’s exactly what happened. When homeowners who could no longer afford their mortgages began to default on their loans, AIG was supposed to either make a payment to back the credit default swaps or buy the CDOs. However, it had no money for either – thus, needing a bailout from the government to avoid bankruptcy.
In Sept. 2008, the government seized control of AIG in exchange for $85 billion to keep it afloat. Later, the company was given $95 billion more. The decision to give the company money was not just to save it, but also the economy from a grand collapse.
AIG after the Fall
After AIG received its bailout funds, everyone hoped that the insurer had learned its lesson and would soon after crawl under a rock, organize its business and emerge the superstar it once was – with a much more humble attitude, of course.
Instead, the company made plans in March 2009 to dish out big bonuses with some of its bailout money. This was a bitter pill for the millions of American taxpayers who had grudgingly doled out money they did not have (taxpayers were not given big bailouts, remember?) to give a company money to reward its reckless activity. Unsurprisingly, the big bonus earners agreed to give back their money shortly thereafter.
It seems like after this mishap, AIG was no longer eager to be the center of negative media attention. Aside from cutting salaries in April and making sure to announce that it was putting bailout funds in place and had stabilized as a company, we didn’t hear much from AIG for the remainder of 2009.
What’s Happening in 2010
So what’s going on with the AIG in 2010? The company has found itself in the news a few times this year already. It seems that U.S. Treasury Secretary, Tim Geithner, is in some trouble after emails revealed that in 2008, when he was head of the New York Fed, urged the heads of AIG to not only sell off its toxic assets at full price and receive a bailout, but also hide how it was selling the assets off.
This news, however, isn’t big news so far. Probably because we already knew AIG engaged in shady dealings and if anything, this weight will fall on Geithner.
In other news, AIG has been urged to avoid imposing too many company restrictions, similar to those that were imposed in 2009, such as compensation cuts. According to the New York Federal Reserve, cutting salaries too drastically could result in key employee departures – something the company (and the government, which is looking to recoup its bailouts) cannot afford. Unfortunately, AIG lost one of its key executives for this very reason only two days before the New Year.
And finally, a California appeals court ruled against AIG in a workers’ compensation arbitration in the first full week of Jan. 2010. The court held AIG liable for around $517 million in California workers’ compensation reinsurance coverage and interest.
Despite all that the company has gone through, it has managed to bounce back in stocks. So far this year, AIG is among the top three insurance stocks and at has recently traded at nearly $30 per share, increasing its numbers within the first days of the New Year.
Could this mean a storybook ending is on the horizon for such a troubled company? Only time will tell what the future holds for AIG.