With total assets of more than 1 trillion USD and revenues of 113 billion USD
as per 2006, AIG used to be the worlds’ largest insurance company (by assets) and
number ten on the Fortune 500 list of the largest US companies.
In the 1990s AIG’s Financial Products unit in London entered into the market
for credit derivatives. Because the underlying debt securities – mostly corporate issues
and some mortgage securities – carried investment
grade ratings, AIG was
happy
to book income in exchange
for providing
insurance. After all, the management
apparently assumed that they
would
never
have
to pay
any claims. By 2008,
AIG
had insured 513 billion USD in debt via CDS contracts including 78 billion USD
mortgage
related CDOs. Industry practice permits firms with very
high credit ratings
to enter into OTC
derivatives
contracts with limited or no collateral or margin
payments.
Since AIG itself used to be a highly rated company,
it did not have
to
post
collateral to its CDS counterparties. This
made the contracts all the more profitable.
32
On 16 September 2008, AIG suffered a serious liquidity crisis following the
downgrade of its credit rating by at least two notches by the three top global rating
agencies, who at the same time warned that more downgrades could follow.
Moody’s Investors Service cut AIG’s rating from Aa3 to A2, a two-notch downgrade.
Standard & Poor’s
Ratings Services even
lowered
the rating to A-minus from
AA-minus,
a three notch reduction while Fitch
Ratings reduced its credit standing
also
by two
notches from AA-minus to A. This
triple strike
hit the insurer in a situation
when it was
struggling to find new
sources of funding at a time of global financial
turmoil which has brought two
of the biggest investment
banks to their knees.
After
this rigorous downgrade
of its creditworthiness
the company was
contractually
obliged to provide
collateral to its trading counterparties, which led to a severe
liquidity
crisis.
The London unit of AIG sold credit protection by writing CDS on CDOs that had
declined in value. To prevent the company from collapsing, and in order for AIG to
meet its obligations to post additional collateral to CDS trading partners, the FED
announced the creation of a secured credit facility of up to 85 billion USD. The
credit facility was secured by the assets of AIG subsidiaries. In addition the FED received
warrants
for a 79.9% equity stake
and the right to suspend dividends to all
Source : Perguruan Tinggi Kedinasan
