Selasa, 27 November 2012

2.1.4. The Case of AIG





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.

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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

 



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