AIG Financial Products
Encyclopedia
AIG Financial Products Corporation. (AIGFP) is a subsidiary of the American International Group
, headquartered in Fairfield, CT, with major operations in London
, it is currently in the process of winding down all of its operations. 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 loses 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 of 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.
started the group in 1987. AIGFP businesses specialize interest rate and currency swaps and, more broadly, the capital markets.
AIGFP focused principally on OTC derivative
s markets and acted as principal in nearly all of its transactions involving capital market
s 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
. 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.
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.
, 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.
American International Group
American International Group, Inc. or AIG is an American multinational insurance corporation. Its corporate headquarters is located in the American International Building in New York City. The British headquarters office is on Fenchurch Street in London, continental Europe operations are based in...
, headquartered in Fairfield, CT, with major operations in London
London
London is the capital city of :England and the :United Kingdom, the largest metropolitan area in the United Kingdom, and the largest urban zone in the European Union by most measures. Located on the River Thames, London has been a major settlement for two millennia, its history going back to its...
, it is currently in the process of winding down all of its operations. 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 loses 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
American International Group
American International Group, Inc. or AIG is an American multinational insurance corporation. Its corporate headquarters is located in the American International Building in New York City. The British headquarters office is on Fenchurch Street in London, continental Europe operations are based in...
corporation in September of 2008. The resulting liquidity crisis
Liquidity crisis
In financial economics, liquidity is a catch-all term that may refer to several different yet closely related concepts. Among other things, it may refer to Asset Market liquidity In financial economics, liquidity is a catch-all term that may refer to several different yet closely related...
essentially bankrupted
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
all of AIG. Many believed that AIG was too big to fail
Too Big to Fail
Too Big to Fail is a television drama film in the United States broadcast on HBO on May 23, 2011. It is based on the non-fiction book Too Big to Fail by Andrew Ross Sorkin. The TV film was directed by Curtis Hanson...
and that an AIG bankruptcy could cause an already fragile financial system to collapse, prompting the Federal Reserve Bank
Federal Reserve Bank
The twelve Federal Reserve Banks form a major part of the Federal Reserve System, the central banking system of the United States. The twelve federal reserve banks together divide the nation into twelve Federal Reserve Districts, the twelve banking districts created by the Federal Reserve Act of...
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
United States Secretary of the Treasury
The Secretary of the Treasury of the United States is the head of the United States Department of the Treasury, which is concerned with financial and monetary matters, and, until 2003, also with some issues of national security and defense. This position in the Federal Government of the United...
, Henry Paulson
Henry Paulson
Henry Merritt "Hank" Paulson, Jr. is an American banker who served as the 74th United States Secretary of the Treasury. He previously served as the Chairman and Chief Executive Officer of Goldman Sachs.-Early life and family:...
announced the treasury's desire to break up and liquidate most of AIG. The company has since been selling off many of its subsidiaries
Subsidiary
A subsidiary company, subsidiary, or daughter company is a company that is completely or partly owned and wholly controlled by another company that owns more than half of the subsidiary's stock. The subsidiary can be a company, corporation, or limited liability company. In some cases it is a...
in order to raise the cash necessary to pay back the Federal Reserve. AIG is currently in the process of closing AIGFP.
History
Howard SosinHoward Sosin
Howard Sosin was born in Illinois and became a financial whiz. He was for a time an associate Professor at the Columbia Business School.He founded American International Group Financial Products in 1987 and remained there until 1993.-References:...
started the group in 1987. AIGFP businesses specialize interest rate and currency swaps and, more broadly, the capital markets.
AIGFP focused principally on OTC derivative
Derivative
In calculus, a branch of mathematics, the derivative is a measure of how a function changes as its input changes. Loosely speaking, a derivative can be thought of as how much one quantity is changing in response to changes in some other quantity; for example, the derivative of the position of a...
s markets and acted as principal in nearly all of its transactions involving capital market
Capital market
A capital market is a market for securities , where business enterprises and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets...
s offerings and corporate finance
Corporate finance
Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value while managing the firm's financial risks...
, investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
and financial risk management
Risk management
Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities...
products. AIGFP played key roles in the acquisition of London City Airport
London City Airport
London City Airport is a single-runway airport. It principally serves the financial district of London and is located on a former Docklands site, east of the City of London, opposite the London Regatta Centre, in the London Borough of Newham in east London. It was developed by the engineering...
and, in one of the largest private equity transactions announced in 2006, the management-led buyout of Kinder Morgan
Kinder Morgan
Kinder Morgan, Inc. is an American energy company. It is also, through a subsidiary, the general partner of and owner of many of the interests in Kinder Morgan Energy Partners, a publicly traded pipeline and terminal limited partnership....
.
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
Gary Gorton
Gary B. Gorton is an American economist who currently serves as professor at Yale School of Management. He is a central figure in the study of the global financial crisis of 2008–2009.-Life and career:...
and K. Geert Rouwenhorst
Geert Rouwenhorst
K. Geert Rouwenhorst is a Professor at Yale School of Management and Deputy Director for International Financial Center at Yale. He is also a partner at SummerHaven Investment management. His work has traced the history of mutual funds through 18th century Netherlands...
. AIGFP created a specialized credit business. AIGFP focused its business on structured products like CDO
CDO
CDO may refer to:* Cagayan de Oro, a city that lies along the northern coastline of Mindanao island, Philippines.* Canyon del Oro High School, a public school in Oro Valley, Arizona, USA....
'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
Dow Jones-AIG Commodity Index
The Dow Jones-UBS Commodity Index DJ-UBSCI is a broadly diversified index that allows investors to track commodity futures through a single, simple measure....
(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.
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. These losses at AIGFP division essentially bankrupted the entire AIG operation, and forced the United States government to bail out the insurer. Under CEO Edward Liddy, the decision was made to unwind AIG Financial Product's entire book of business. Gerry Pasciucco, a managing director at Morgan StanleyMorgan Stanley
Morgan Stanley is a global financial services firm headquartered in New York City serving a diversified group of corporations, governments, financial institutions, and individuals. Morgan Stanley also operates in 36 countries around the world, with over 600 offices and a workforce of over 60,000....
, 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.