The AIG Bailout

Abstract:     
On February 28, 2008, American International Group, Inc. (AIG), the largest insurance company in the United States, announced 2007 earnings of $6.20 billion or $2.39 per share. Its stock closed that day at $50.15 per share. Less than seven months later, however, AIG was on the verge of bankruptcy and had to be rescued by the United States government through an $85 billion loan. Government aid has since grown to $182.5 billion, and AIG’s stock recently traded at less than $1.00 per share.

The Article explains why AIG, a company with $1 trillion in assets and $95.8 billion in shareholders’ equity, suddenly collapsed. It then details the terms of the government bailout, explores why it was undertaken, and questions its necessity. Finally, the Article describes the regulatory gap exploited by AIG and offers some thoughts on regulatory reform.

Keywords: credit default swaps, CDS, derivatives, American International Group, AIG, Commodity Futures Modernization Act

JEL Classifications: K20, K22, G8, G28, G38

Accepted Paper Series