AIG - Causes of Collapse

  • CDS
  • Communication Failures
  • Management Failures
  • Mortgage Backed Securities
  • Rating Downgrades
  • Regulation
    • OTS
    • States
  • Repos
  • Risk Management
  • Securities Lending
  • June COP Report
  • COP Hearing - Silvers / Millstein
  • Lloyd C. Blankfein, Chairman and CEO, The Goldman Sachs Group - FCIC Interview mp3
    • AIGFP had the Money
    • Thought the real problem with AIG was the Repos
  • Scott Polakoff - FCIC Interview - mp3
  • 2009 0305 - GOV (Senate) - American International Group: Examining What Went Wrong, Government Intervention, And Implications for Future Regulation - aka Government Intervention and Regulation of AIG - [PDF-72pCSPAN, - Video-Senate-Error]
    • (p4) - Senator Shelby - AIG’s problems, however, were not isolated to its credit default swap business.
      • Significant losses in AIG’s State-regulated life insurance companies also contributed to the company’s collapse.
    • (p33) - Chairman DODD.  And again, looking at the statement by Mr. Dinallo, and they argue this, we all accept, I think you have heard it said, the primary source of the problem was the FP......

  • 2010 0526 - COP - Hearing - TARP and Other Government Assistance for AIG - [PDF-241p,
    • Damon Silvers - (COP Member / policy director for the AFL-CIO)
    • Jim Millstein - (Chief Restructuring Officer, U.S. Department of the Treasury)

    • (p218) - Mr. SILVERS.  Is it not the case that in the week of September 15, 2008, that the cash calls that the company could not meet were in two lines of business and two lines of business only.
      • And but for those cash calls, none of this would have been necessary?
      • And those two lines of business were, and it depends on what— you know you can believe or not—you can argue I guess with the state insurance regulators, they certainly were the swaps business and they may have been the securities lending business.
      •  And but for those two enterprises, none of this would have occurred?
        • Is that not so?
    • Mr. MILLSTEIN. That is not so.  ---  So let me——
    • Mr. SILVERS. Are you seriously asserting that if you wipe those two pieces of business off the books, that AIG was nonetheless insolvent?
    • Mr. MILLSTEIN. Let me——
    • Mr. SILVERS. And are you accusing the New York State Insurance Commissioner of lying to this panel?

2010 0610 - COP - The AIG Rescue, Its Impact on Markets, and the Government’s Exit Strategy - 337p

3. The Causes of AIG’s Problems

  • The trigger and primary cause of AIG’s collapse came from inside AIGFP. 
  • In the words of Marshall Huebner of Davis Polk & Wardwell, a law firm that represented FRBNY, the securities lending problems contributed to a ‘‘double death spiral.’’ 22
  • The problems in AIGFP exacerbated the problems in securities lending, and vice versa, as collateral demands from both setsof counterparties quickly imperiled the company’s liquidity position as it struggled to meet its cash demands.
  • Meanwhile, the company’s insurance operations were incapable of generating the requisite cash either through normal operations or asset sales to fund the parent company.
  • In both cases, the threats within these businesses emanated from outsized exposure to the deteriorating mortgage markets, owing to grossly inadequate valuation and risk controls, including insufficient capital buffers as losses and collateral calls mounted.  (p18-19)

2010 0202 - WSJ - Eric Dinallo -  What I Learned at the AIG Meltdown: State Insurance Regulation Wasn’t the Problem - [link] 

  • Three, in September 2008 the Federal Reserve acted to protect the financial system from what it believed to be an imminent risk of catastrophic damage from AIG Financial Products.

Before addressing those issues, however, let me again emphasize that securities lending did not pose unmanageable systemic risk and was not the reason for federal intervention.

  • AIG Financial Products was the source of federal intervention.

2009 0318 - NAIC / GOV - Joel Ario (PA) - American International Group's Impact on the Global Economy: Before, During, and After Federal Intervention - 12p

  • The Congressional Oversight Panel (“COP”) found that AIG was brought down by the company’s “insatiable appetite for risk and blindness to its own liabilities.”16
  • According to the Financial Crisis Inquiry Commission (“FCIC”), “AIG failed and was rescued by the Government primarily because its enormous sales of credit default swaps were made without putting up initial collateral, setting aside capital reserves, or hedging its exposure — a profound failure in corporate governance, particularly its risk management practices.”17

2012 0725 - SIGTARP - AIG Remains in TARP as TARP’s Largest Investment - 22p

16. Congressional Oversight Panel, “June Oversight Report: The AIG Rescue, Its Impact on Markets, and the Government’s Exit Strategy,” 6/10/2010, p. 7,  - 
17. Financial Crisis Inquiry Commission, “The Financial Crisis Inquiry Report,” 1/27/2011, p. 352,

  • 2011 - OCC - So That’s Operational Risk! (How operational risk in mortgage-backed securities almost destroyed the world’s financial markets and what we can do about it), Douglas Robertson, Office of the Comptroller of the Currency. OCC Economics Working Paper 2011-1 - 54p
  • Abstract: We describe the economic crisis that began in the U.S. mortgage market in late 2006 as a consequence of cascading operational failures linked to the securitization process.
  • Operational risks including mortgage fraud, negligent underwriting standards and failed due diligence combined with modern finance to initiate a nearly catastrophic crisis in financial markets and a painful recession.

2017 1024 - GOV (House) - The Federal Government’s Role in the Insurance Industry - [PDF-140pVIDEO-youtube]

  • Chairman DUFFY. And I wanted to look forward to legislative fixes, but before I do that I do want to take a look back. And Mr. Schwarcz had mentioned AIG.
    But maybe I will go to Ms. Wade first. When you look at AIG and the insurance aspect of AIG versus the holding aspect of AIG, did the insurance portion of AIG fail that was supervised by the— this—under our State insurance model? Or did the holding company with financial products fail? Do you know the answer to that?
  • Ms. WADE. It was the holding company related to the financial products. So the Office of Thrift Supervision was the consolidated regulator for—for AIG at the time. The States had identified this— the securities lending issues and were winding those down. It was the result of the derivatives, the financial products, that caused a liquidity crisis that resulted in AIG’s challenges during the financial crisis.
  • Chairman DUFFY. So just to repeat again, who was the regulator of the holding company of AIG?
  • Ms. WADE. The Office of Thrift Supervision.
  • Chairman DUFFY. Now, are they a State insurance regulator?
  • Ms. WADE. No, and in fact State insurance regulators were preempted from addressing the issues that caused the—
  • Chairman DUFFY. And so the problems were not on the insurance side that was regulated by the State. Is that correct?
  • Ms. WADE. Correct.

2013 06 - GAO - Insurance Markets: Impacts of and Regulatory Response to the 2007–2009 Financial Crisis - aka Insurance Study - 91p

Concerns about the oversight of the insurance industry arose during the 2007-2009 financial crisis, when one of the largest U.S. holding companies that had substantial insurance operations, American International Group, Inc. (AIG), suffered large losses.

  • These losses were driven in large part by activities conducted by a non-insurance affiliate, AIG Financial Products, but also included securities lending activity undertaken by some of its life insurance companies which created liquidity issues for some insurers.

The losses threatened to bankrupt the company....