AIG Financial Products

AIG Financial Products Corporation (AIGFP) is a subsidiary of the American International Group, headquartered in New York, New York, with major operations in London. The collapse of AIG Financial Products is considered to have played a pivotal role in the global financial crisis of 2008–2009. In the Spring of 2008 AIGFP suffered enormous losses from credit default swaps that it issued and traded. When these credit default swaps were issued in years prior, the management of AIGFP believed they would only have to pay out very few, if any of the swaps. However, as the financial crisis worsened during early 2008 many companies began to default on their debt, forcing AIGFP to assume losses greater than what was ever anticipated.

The losses at AIGFP caused credit agencies to downgrade the credit rating of the entire AIG corporation in September 2008. The resulting liquidity crisis essentially bankrupted all of AIG. Many believed that AIG was too big to fail and that an AIG bankruptcy could cause an already fragile financial system to collapse, prompting the Federal Reserve Bank 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. Shortly after, then treasury secretary, Henry Paulson announced the treasury's desire to break up and liquidate most of AIG. The company has since been selling off many of its subsidiaries in order to raise the cash necessary to pay back the Federal Reserve. AIG is currently in the process of closing AIGFP. AIGFP is currently headquartered in Wilton,Connecticut

History

Howard Sosin started the group in 1987. AIGFP businesses specialize interest rate and currency swaps and, more broadly, the capital markets.

AIGFP focused principally on OTC derivatives markets and acted as principal in nearly all of its transactions involving capital markets offerings and corporate finance, investment and financial risk management products. AIGFP played key roles in the acquisition of London City Airport 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 helped stimulate the development of this new asset class. AIGFP's sponsored a major study on the historical performance of commodity futures by professors Gary Gorton and K. Geert Rouwenhorst.[1] 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 (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.[2]

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 derivatives led to enormous losses.[3] These losses at AIGFP division essentially bankrupted the entire AIG operation, and forced the United States government to bail out the insurer.[4] 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, 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.[5]

The story of AIGFP losses is substantially profiled in the book The Big Short by Michael Lewis.

References
  1. AIG Financial Products Corp. Releases Innovative Academic Research on Commodities, Business Wire, July 11, 2007
  2. What Greenberg Might Have Said, National Underwriter, Oct 7, 2008.
  3. Behind Insurer’s Crisis, Blind Eye to a Web of Risk, New York Times, September 27, 2008.
  4. AIG Former Auditor Warned About Derivative Valuation in 2007, Bloomberg News, October 11, 2008.
  5. Teitelbaum, Richard and Hugh Son. "Unwinding at AIG Prompts Pasciucco to Ponder Systemic Failure", Bloomberg, July 1, 2009. Retrieved on July 1, 2009.
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