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American International Group (AIG) - Essay Example

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Name: Professor: Course: Date: American International Group (AIG) Financial product division The financial division activities in AIG are considered to be the principal cause that brought the company down. The AIG crisis did not result from state regulated insurance companies, but principally the crisis arose from the company’s financial products, which comprised written credit default swaps, derivatives and futures with a national amount of about $2.7 trillion, encompassing around $ 440 billion outstanding of credit non-payment swaps…
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American International Group (AIG)
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American International Group (AIG)

Download file to see previous pages... These resulted when AIG was encountered with ratings downgrades. The company underwent demands of tens of billions of dollars for cash collateral on the credit default swops that were written by financial products and assured by the investing company. Some of the world’s biggest financial institutions managed to hedge their contribution in the risky credit default swap business living AIG struggling on its own (Roth and Buchwalter, 1). AIG selected the federal office of Thrift supervision (OTS) after purchasing a saving’s loan in 1999, which was an agency charged with supervision of savings, loan banks and economy associations. OTS became the primary regulator of the company. Notably AIG financial products are not a licensed insurance agency; therefore, it was not synchronized by the states. The financial product is primarily an investment that is based in London. It managed to evade control, as provided by the British financial services authority, principally because OTS, which was an equivalent regulator of the British regulatory body, had registered the AIG holding company. Nonetheless, even though OTS accepted its part as the holding company regulator, it should be understood that credit swaps were exempted from regulation by British policies thus preventing the states from regulating these instruments (Dinallo, 4). Collateralized Death Obligations Most people buy life insurance for the profit off their family members or those that rely on their on their earnings. Banks would buy a large number of life settlements to create the collateral pool which they would expect to begin making payment as earlier as probable. However, risks arise when the insurer fails to meet the death gain claim. This policy entails that investors will persist in paying out premiums on insurance and will eventually get the payout once a person dies. If the policyholder encounters his death earlier, this will entail that the returns will be immense. However, if there is a greater increase in life expectancy for a certain segment of the populace. Companies such as AIG lose money in downturns when claims mount which at times may result in bankruptcy (Lewitt, 183). Recently AIG has sought to garner support among investors and credit ratings companies for a deal that is highly viewed as controversial. This is the sale of securities supported by insurance guidelines of the aging people. However, this has gained few customers as critics refer to these deals as death bonds because they principally pay once the insured person has demised. The giant insurer’s life-settlements portfolio overall sum is $18 billion in anticipated death benefits. This is in regard to the company’s financial filings which has witnessed an approximation of over $45 billion traded since the market started over a decade ago. The AIG activity in a way depicts the company’s entrepreneurial culture as well as exhibiting hoe the company has fallen in last few years as it strived to raise funds to repay the government bailout, thus resulting on it making little profits (Sullivan, 1). Credit Default Swaps (CDS) ...Download file to see next pagesRead More
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