AIG is a multinational insurance corporation that has its headquarters at the American International Building in New York. The corporation has headquarters in other, different countries such as Paris, Britain, and China. Research indicates that, AIG was featured in the 2011 Forbes Global List as number 29 among the largest companies in the world. The company experienced a significance success from 2004 to 2008, as it was listed on the Dow Jones Industrial Average. However, sometime in September 2008, the company plummeted into a liquidity crisis. This was indicated by downgrading of the company’s credit ratings below “AA” levels. This prompted the Federal Reserve Bank to take a measure in order to revive the company. Thus, AIG was forced to surrender most of its assets to service the loans received, and it still does currently.
This paper explores the probable future of AIG and the logic behind government’s bailout of the company.
Research indicates that the company suffered a significant blow when its credit rating was lowered in 2008. There was a liquidity crisis as the company was forced to add more collateral with its trading counter parties in order to engage in swaps with the parties. For instance, despite the Federal Bank decision to help the company, it continued accumulating losses that it had to surrender most of its assets to stay afloat (Brown, 123). This proves the bleak future of the company as research ascertains that the company's losses indicate a downward trend of the company.
Secondly, the further losses reported by the company indicate its probable bleak future. According to research, the company experienced a fourth quarter loss amounting to 61.7 billion, which according to corporate history was the highest (Pederson, 75). Consequently, trading operations of the company in Asia and Europe were affected due to sharp falls. Research also asserts that the company’s rating at Dow Jones Industrial Average plummeted significantly with 7000 points a trend exhibited in twelve years. Notably, this immense drop in rating took place in three months a clear indicator that the company would unlikely flourish in the future.
AIG also baffled many in 2009 when it announced employee bonus payments amidst financial crisis and bailouts. Research intimates that most politicians condemned the move, as it was tantamount to embezzlement of taxpayers’ funds. Barney Frank, who chairs the House Financial Services Committee, was categorical on the issue by indicating that it amounted to rewarding incompetence (McCool, 201). This proves the company’s lack of commitment to its success as the managers allowed employee bonus payments when the company was ailing.
AIG was involved in a sponsorship deal with Manchester United, an English Football club. The sponsorship was stipulated to run from 2006 to 2010. Most people expected that the company would continue its sponsorship of the football club a thing that never happened and no reasons provided (Brown, 52). Arguably, the company was experiencing financial glitches, which could not permit it to continue with the sponsorship. This is another indicator of the probable collapse of the company as it is engaging in self-revival currently.
The Necessity of Government Involvement
Firstly, it was inevitable for the government to get involved as it forms the largest shareholder in the company. This means that if the government could have had a stake in the company’s losses if it had not intervened. In addition, it should be noted that the company is a significant contributor to the United States economy, which forces the government to take an interest in the company’s affairs (McCool, 93).
Research also indicates that Financial Corporations and banks are AIG’s mutual funders. This means that banks and financial institutions would suffer a significant blow in case the company fails and the blame will be on the government. Lastly, AIG was the renowned seller of ‘credit-default transacts’. These are insurance policies against default on assets bound to corporate debt and mortgage safeties. If AIG collapsed the financial sectors in the United States, Asia and Europe that bought these swaps would be obligated to write them off as losses. This would imply a hit in the world’s economy. There was an agent need for the government to intervene to rescue the world financial institutions from suffering the great loss.
In conclusion, AIG’s image was soiled after its credit rating was lowered. Myriad factors indicate the company’s possible collapse in the future and these include liquidity crisis, immense losses, unwarranted employee bonuses, and lack of sponsorship capability. The government’s involvement was inevitable as the company contributed significantly to the US economy and could land banks and financial institutions into massive debts.