FINANCIAL ACCOUNTING

AND ANALYSIS

PROJECT:
AMERICAN INTERNATIONAL GROUP (AGI)

ASSIGNED TO:
Ayush Dipakbhai Aslaliya
Roll no. 23032 , BMS 1A
Nakul Kumar
Roll no. 23072 , BMS 1A

ASSIGNED BY:
Tripti Goel
Assistant Professor
Delhi University
 CONTENT:

 Introduction to AIG
 Mortgage crisis
 Accounting scandal
 Getting Bailed Out
 Plagiarism report
 INTRODUCTION
American International Group (AIG) is a multinational finance and insurance
corporation with operations in over 80 countries and jurisdictions. It operates
through three core businesses: general insurance, life & retirement, and a
technology-enabled subsidiary. AIG was founded on December 19, 1919, by
Cornelius Vander Starr, who founded American Asiatic Underwriters (AAU) in
Shanghai, China. In 1926, Starr opened the American International Underwriters
Corporation (AIU) in the United States, focusing on Latin America to offset the
decline in business due to World War II.
AIU expanded in Europe, opening offices in France, Italy, and Great Britain. In
1952, Starr focused on the American market by purchasing the Globe and Rutgers
Fire Insurance Company and its subsidiary, the American Home Fire Assurance
Company. By the end of the decade, AIG had an extensive network of agents and
offices in over 75 countries.
AIG expanded its market by introducing specialized energy, transportation, and
marine products to meet the needs of niche industries. In the 1980s, AIG
introduced a wide range of specialty products, including pollution liability and
political risk. In 1984, AIG listed its shares on the New York Stock Exchange (NYSE).
In the 1990s, AIG developed new sources of income through investments,
including the acquisition of International Lease Finance Corporation (ILFC). In
1992, AIG received its first foreign insurance license from the Chinese government
in over 40 years.
In the early 2000s, AIG experienced significant growth by acquiring General
Corporation of America and entering new markets, including India. In 2000, AIG
formed the Strategic Advisory Group with Blackstone Group and Kissinger
Associates, providing financial advisory services to companies seeking strategic
advice. AIG also made significant investments in Russia during the country's
recovery from the financial crisis. In 2004, AIG reached a $126 million settlement
with AIG, partially resolving regulatory issues by the US Securities and Exchange
Commission and the Department of Justice. The company continued to cooperate
with investigators investigating the sale of unconventional insurance products
 CONNECTION OF AIG WITH SUBPRIME
MORTGAGE CRISIS
Before its staggering accident, AIG had been known as Wall Street's "Golden
Goose" because of its ideal credit rating. Since the 1980s, it had flaunted the most
elevated conceivable rating, AAA, which was assigned by Moody's in 1986, and
Standard and poor's much prior, back in 1983. This permitted AIG to acquire for
less, invest at higher paces of return (frequently in more risky securities), and
benefit from the spread. Furthermore, on the grounds that AIG was viewed as so
protected, its exercises are less oversight than those of large numbers of its rivals.
In 1998, one of AIG's subsidiaries, AIG Financial Products, which was situated in
Connecticut, however led most of its tasks in London, utilized the organization's
AAA assurance for its potential benefit. It turned into an over-the-counter vendor
of what was then a mostly secret and exotic derivative called a credit default
swap. Think about it like a type of protection on an obligation commitment, like a
home loan upheld security. The main distinction was that this sort of protection
got minimal guidelines and due to its authentic AAA rating, it required no
collateral.
As per the Financial Crisis Inquiry Commission, which was made by Congress to
comprehend — and apparently forestall — emergency of seismic proportions, by
2003, AIG's credit default trades on a senior-evaluated classification of subprime
mortgage-backed securities, known as collateralized debt obligation (CDOs), were
esteemed at $2 billion. By 2005, they had swelled to $54 billion
Zoom out briefly to grasp the magnitude of growth in the U.S. housing market at
the time since it was just relentless. A time of low interest rates, simple credit,
and almost boundless interest had energized one of the greatest resources rises
ever. U.S. home costs doubled from 1998 to 2006, and the housing sector
represented almost 40% of all new jobs created. Homeownership rates took off,
especially for first-time buyers, because of another credit class called the
subprime mortgage.
These mortgages were often sold by predatory lenders focusing on low-pay and
minority populaces, frequently individuals with low credit scores who never
envisioned it would be feasible to claim their very own home. Americans'
mailboxes and inboxes were overwhelmed everyday with notices encouraging
them to purchase or renegotiate. Telemarketers intruded on large number of
supper times with commitments of zero-money-down and no-documentation
credits, which would be subsequently named "liar loans" because of misdirect
publicizing.
Subprime mortgages had flexible paces of revenue that were fixed to winning
interest rates, and in case of a rate hike by the Federal Reserve, their home loan
rates would "reset," or shoot up higher, frequently by a few hundred bucks per
month. But as long as the housing market stayed hot, housing-related
investments would, too.
Credit default trades should safeguard investors against a default in mortgage-
backed securities, and AIG stamped benefits selling billions of dollars of these
harmful subprime-powered credit default swaps to banks, both in Europe and the
US.
Banks found these arrangements appealing, again in view of AIG's flawless credit
score, which enormously diminished how much capital they expected to hold
against a resource — from 8% to simply 1.6%. As such, banks accepted these
credit default swaps worth the cost since they brought down their credit risk. By
2007, AIG had sold $379 billion worth of credit default swaps, just expanding the
lodging bubble further. AIG Financials' operating income had grown to $4.4
billion, representing almost 30% of AIG's total business.
 AIG’S ACCOUNTING SCANDAL
The flicker started to blur from AIG's clean standing in 2005, when auditors found
that the organization had exaggerated its profit by $3.9 billion. New York Attorney
General Eliot Spitzer accused the organization of " improper and inappropriate"
transactions and accounting irregularities, charging CEO Maurice "Hank"
Greenberg for his own association in directing the deceitful exercises. (Greenberg
would later compensate $9.9 million in fines.)
Thus, all three credit rating agencies, Fitch, Moody's and Standard and Poor's,
downsized AIG's appraising to AA+. This would release a line of dominoes that
would cause the organization's possible breakdown, since losing its AAA
designation intended that, if the worth of its CDOs fell, AIG's trading partners
could now demand that the company post collateral-hich they surely did.

HOW AIG FAIL?

One of the most serious issues with credit default swaps had to do with their
absence of oversight. Nobody truly realized what was bound inside these
packages of debt, not even the leaders at AIG. For example, one "multisector"
CDO was publicized as having under 10% subprime exposure, when it was nearer
to 80%. While housing prices crested in 2006, AIG began to diminish its deals of
CDOs, yet by then, at that point, the harm had been finished. AIG had $79 billion
in CDO swaps and not one dollar in collateral.
Everything started to fall out for the housing market in July 2007. The Federal
Reserve made a series of interest hikes to control inflation, making millions of
subprime borrowers' default on their credits. The market for mortgage-backed
securities, such as CDOs, just fell. On July 10, the credit rating agencies issued
downgrades on 431 subprime-upheld protections worth more than $5.2 billion.
AIG's counterparties had perceived the implications of the organization's initial
credit downgrade and confronted with the probability of mounting misfortunes
from their own subprime exercises, Goldman Sachs, which claimed $21 billion in
AIG's credit default swaps, made a move. On July 11, 2007, one day after the
credit minimize, it sent an edge call to AIG on $20 billion, alongside a receipt for
$1.8 billion in collateral.
The game was up for AIG.
In declaration to the FCIC, AIG leaders admitted surprise — even shock — over
the collateral call from Goldman Sachs, to some degree in light of the fact that
AIG Financial was not controlled as a protection auxiliary, and hence they
accepted supports like collateral were pointless.
In any case, what may be considerably more astounding was the way that AIG
analysts couldn't successfully question Goldman's collateral claims since they had
no genuine method to value their CDOs.
AIG Financial utilized an actuarial valuation model created by Gary Gorton, which
didn't appraise the market worth of Credit Debtor (CDO) contracts. AIG's
evaluator, PricewaterhouseCoopers, supported this up, expressing that there
were no substantive economic risks in the portfolio. AIG revealed its $79 billion in
CDOs yet didn't refer to the collateral call from Goldman Sachs. The following day,
AIG posted a $450 million "up front installment" to Goldman Sachs, yet different
calls came flooding in. Rating agencies had distributed minimizations of hundreds
more CDOs, and the home loan market entered a spiral. AIG revealed its third
quarter earnings on November 7, yet had posted a $352 million charge connected
with its CDO portfolio and a $550 million valuation loss. PricewaterhouseCoopers
auditors embraced a "negative premise change" between the worth of its
subordinates and the worth of its trade security, changing its income gauges from
$5.1 billion to $1.5 billion.
Nonetheless, by February 2008, the reviewers had a shift in perspective, saying
this change had been "ill-advised" and "unsupported." AIG recorded a report with
the SEC about their "material shortcoming" between valuations, prompting rating
agencies minimizing the organization and causing a loss of $5.29 billion.
On February 11, 2008, just a little way from its final quarter profit declaration, AIG
documented a report with the SEC about their "material shortcoming" between
valuations — and the rating agencies jumped. Moody's and S&P downgraded the
company again, prodding yet more security calls. At the point when AIG's final
quarter income was declared on February 11, 2008, the organization posted a
deficiency of $5.29 billion — with $2.6 billion of that coming from its CDOs. The
Office of Thrift Supervision (OTC), which directed American insurance agency, also
downgraded AIG, it was currently a "moderate to severe supervisory concern."
AIG was trapped in a death spiral. By September 2008, AIG's security calls had
soared to $23.4 billion, with considerably more minimizations ready to go, which
would prompt yet more guarantee calls. Business at AIG had crumbled to where
the organization was perched on just $9 billion in real money, which would keep it
above water for a minimum of over seven days. The leading group of AIG held a
crisis meeting with the Central Bank of New York on Friday, September 12.
 HOW DID AIG GET BAILED OUT?
AIG's collapse was a catastrophic event for the global financial system, as it had
traded a wide range of products with the world's largest banks. Fed officials
initially believed AIG would be "bailed out" by the private sector, with Warren
Buffett and his private equity partners already in talks with the company. Another
scenario positioned AIG's subsidiaries as loaning their parents the cash it needed
to tide it over. However, as the weekend progressed, it became clear that these
deals would not materialize. Lehman declared bankruptcy, which rattled other
banks.

The Fed initially was reluctant to send assistance to AIG due to the "moral hazard"
involved with bailing it out, as it would send the message that poor risk
management would be rewarded. The Fed tried to organize a consortium of
banks to loan $75 billion to AIG, but after further downgrades, AIG's stock tanked,
losing over half of its value in afternoon trading. The banks rejected the deal,
choosing instead to protect their own balance sheets.

Fearing widespread financial contagion, the Federal Reserve Board of Governors

and Federal Reserve Bank of New York President Tim Geithner used section 13 (3)
of the Federal Reserve Act to send AIG an initial loan of $85 billion. Under the
Troubled Asset Relief Program (TARP), AIG received an additional $70 billion. AIG
remained under federal control until 2012, when the Treasury sold its final shares
of AIG common stock, amounting to $22.7 billion.