AIG Financial Products Corporation (AIGFP) is a subsidiary of the
American International Group
American International Group, Inc. (AIG) is an American multinational finance and insurance corporation with operations in more than 80 countries and jurisdictions. , AIG companies employed 49,600 people.https://www.aig.com/content/dam/aig/amer ...
, headquartered in
New York, New York
New York, often called New York City or NYC, is the most populous city in the United States. With a 2020 population of 8,804,190 distributed over , New York City is also the most densely populated major city in the Uni ...
, with major operations in
London
London is the capital and largest city of England and the United Kingdom, with a population of just under 9 million. It stands on the River Thames in south-east England at the head of a estuary down to the North Sea, and has been a majo ...
. The collapse of AIG Financial Products, headquartered in
Wilton, Connecticut
Wilton is a town in Fairfield County, Connecticut, United States. As of the 2020 census, the town population was 18,503. In 2017, it was the sixth-wealthiest town per capita in Connecticut, the wealthiest U.S. state per capita.
Officially recog ...
, is considered to have played a pivotal role in the
global financial crisis of 2008–2009
Global means of or referring to a globe and may also refer to:
Entertainment
* ''Global'' (Paul van Dyk album), 2003
* ''Global'' (Bunji Garlin album), 2007
* ''Global'' (Humanoid album), 1989
* ''Global'' (Todd Rundgren album), 2015
* Bruno ...
.
In spring 2008, AIGFP suffered enormous losses from
credit default swaps
A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a debt default (by the debtor) or other credit event. That is, the seller of the CDS insures the buyer against so ...
that it issued and traded in earlier years. Company officials issued the swaps believing they would have to pay out few, if any, of them. But as the financial crisis worsened during early 2008, many companies began to default on their debt, forcing AIGFP to assume losses far greater than anticipated.
The losses at AIGFP caused credit agencies to downgrade the
credit rating
A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting.
...
of the entire
AIG
American International Group, Inc. (AIG) is an American multinational finance and insurance corporation with operations in more than 80 countries and jurisdictions. , AIG companies employed 49,600 people.https://www.aig.com/content/dam/aig/amer ...
corporation in September 2008. The resulting
liquidity crisis In financial economics, a liquidity crisis is an acute shortage of ''liquidity''. Liquidity may refer to market liquidity (the ease with which an asset can be converted into a liquid medium, e.g. cash), funding liquidity (the ease with which borrow ...
essentially
bankrupted all of AIG. Many believed that AIG was
too big to fail
"Too big to fail" (TBTF) and "too big to jail" is a theory in banking and finance that asserts that certain corporations, particularly financial institutions, are so large and so interconnected that their failure would be disastrous to the great ...
and that an AIG bankruptcy could cause an already fragile financial system to collapse, prompting the
Federal Reserve Bank
A Federal Reserve Bank is a regional bank of the Federal Reserve System, the central banking system of the United States. There are twelve in total, one for each of the twelve Federal Reserve Districts that were created by the Federal Reserve A ...
to extend an $85 billion line of credit to AIG. As a result, the Federal Reserve was issued a stock warrant for 79.9% of the equity in AIG, effectively nationalizing the world's largest
insurer
Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...
. Shortly after,
U.S. Treasury Secretary Henry Paulson
Henry Merritt Paulson Jr. (born March 28, 1946) is an American banker and financier who served as the 74th United States Secretary of the Treasury from 2006 to 2009. Prior to his role in the Department of the Treasury, Paulson was the Chairman a ...
announced the treasury's desire to break up and liquidate most of AIG. The company has since sold off many of its
subsidiaries to raise the cash to repay the Federal Reserve
AIG closed AIGFPin December 2022.
History
Howard Sosin
Howard Sosin was born in Illinois
Illinois ( ) is a state in the Midwestern United States. Its largest metropolitan areas include the Chicago metropolitan area, and the Metro East section, of Greater St. Louis. Other smaller metropolita ...
started the group in 1987. AIGFP businesses specialize interest rate and currency swaps and, more broadly, the
capital markets
A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers to ...
.
AIGFP focused principally on OTC
derivative
In mathematics, the derivative of a function of a real variable measures the sensitivity to change of the function value (output value) with respect to a change in its argument (input value). Derivatives are a fundamental tool of calculus. F ...
s markets and acted as principal in nearly all of its transactions involving
capital market
A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers t ...
s offerings and
corporate finance
Corporate finance is the area of finance that deals with the sources of funding, the capital structure of corporations, the actions that managers take to increase the Value investing, value of the firm to the shareholders, and the tools and anal ...
,
investment
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing i ...
and financial
risk management products. AIGFP played key roles in the acquisition of
London City Airport
London City Airport is a regional airport in London, England. It is located in the Royal Docks in the Borough of Newham, approximately east of the City of London and east of Canary Wharf. These are the twin centres of London's financial ...
and, in one of the largest private equity transactions announced in 2006, the management-led buyout of
Kinder Morgan.
AIGFP's commodity derivatives and
commodity indices A commodity price index is a fixed-weight index or (weighted) average of selected commodity prices, which may be based on spot or futures prices. It is designed to be representative of the broad commodity asset class or a specific subset of commodit ...
helped stimulate the development of this new asset class. AIGFP's sponsored a major study on the historical performance of
commodity futures
In finance, a futures contract (sometimes called a futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset ...
by professors
Gary Gorton
Gary Bernard Gorton (born c. 1951) is an American economist who currently serves as the Frederick Frank Class of 1954 Professor of Finance at Yale School of Management. He is known for his theory on the role of repurchase agreements on the 2008 f ...
and K.
Geert Rouwenhorst
K. Geert Rouwenhorst is the Robert B. and Candice J. Haas Professor at Yale School of Management and Deputy Director for International Financial Center at Yale. He is also a partner at SummerHaven Investment management. His work has traced the h ...
.
[AIG Financial Products Corp. Releases Innovative Academic Research on Commodities](_blank)
Business Wire, July 11, 2007 AIGFP created a specialized credit business. AIGFP focused its business on structured products like
CDO's. In 2003, it absorbed subsidiary, AIG Trading Group (AIG-TG) which dealt primarily in over the counter derivatives and created the
Dow Jones-AIG Commodity Index The Bloomberg Commodity Index (BCOM) is a broadly diversified commodity price index distributed by Bloomberg Index Services Limited. The index was originally launched in 1998 as the Dow Jones-AIG Commodity Index (DJ-AIGCI) and renamed to Dow Jones ...
(DJ-AIGCI) from their offices in Greenwich, CT. At that point, the Market and Credit Risk management groups were reduced in size. The DJ-AIGCI is a leading commodity benchmark composed of 19 futures contracts on physical commodities. As of the end of June 2007, there was an estimated $38 billion invested in financial products that track the DJ-AIGCI on a global basis.
[What Greenberg Might Have Said](_blank)
National Underwriter, Oct 7, 2008.
From 1987 to 2004, AIGFP contributed over $5 billion to AIG’s pre-tax income. During that period, AIG's market capitalization increased from $11 billion to $181 billion, and its stock price increased from $4.50 per share to $62.34 per share.
Crisis of 2008
AIGFP's trading in
credit derivative
In finance, a credit derivative refers to any one of "various instruments and techniques designed to separate and then transfer the '' credit risk''"The Economist ''Passing on the risks'' 2 November 1996 or the risk of an event of default of a co ...
s led to enormous losses.
[Behind Insurer’s Crisis, Blind Eye to a Web of Risk](_blank)
New York Times, September 27, 2008. These losses at AIGFP division essentially bankrupted the entire AIG operation, and forced the United States government to bail out the insurer.
[AIG Former Auditor Warned About Derivative Valuation in 2007](_blank)
Bloomberg News, October 11, 2008. Under CEO
Edward Liddy, the decision was made to unwind AIG Financial Product's entire book of business. Gerry Pasciucco, a vice chairman at
Morgan Stanley
Morgan Stanley is an American multinational investment management and financial services company headquartered at 1585 Broadway in Midtown Manhattan, New York City. With offices in more than 41 countries and more than 75,000 employees, the fir ...
, who was not involved with AIG FP when it made its catastrophic bets, was selected to manage the unwinding of the portfolio in October 2008, after the company had effectively failed and been taken over by the
Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
.
[Teitelbaum, Richard and Hugh Son]
"Unwinding at AIG Prompts Pasciucco to Ponder Systemic Failure"
''Bloomberg Bloomberg may refer to:
People
* Daniel J. Bloomberg (1905–1984), audio engineer
* Georgina Bloomberg (born 1983), professional equestrian
* Michael Bloomberg (born 1942), American businessman and founder of Bloomberg L.P.; politician and m ...
'', July 1, 2009. Retrieved on July 1, 2009.
The story of AIGFP losses is substantially profiled in the book ''
The Big Short
''The Big Short: Inside the Doomsday Machine'' is a nonfiction book by Michael Lewis about the build-up of the United States housing bubble during the 2000s. It was released on March 15, 2010, by W. W. Norton & Company. It spent 28 weeks on '' ...
'' by
Michael Lewis
Michael Monroe Lewis (born October 15, 1960) Gale Biography In Context. is an American author and financial journalist. He has also been a contributing editor to ''Vanity Fair'' since 2009, writing mostly on business, finance, and economics. He ...
.
External links
AIG Financial Productshome page.
References
{{American International Group
Companies based in New York (state)
Financial services companies established in 1987
American International Group
American companies established in 1987
Companies that filed for Chapter 11 bankruptcy in 2022