AIG: From the Brink of Collapse to a
Remarkable Revival
1) Introduction
American International Group (AIG) was one of the largest insurance and financial services
companies in the world, known for offering a wide range of products including property-
casualty insurance, life insurance, and financial derivatives. However, during the 2008
financial crisis, AIG faced a severe liquidity crisis due to its heavy involvement in the credit
default swap (CDS) market, which led to a near-collapse. The U.S. government had to
intervene with a massive $182 billion bailout to prevent systemic financial failure.
Following this near-collapse, AIG underwent significant restructuring, including selling off
assets, changing leadership, and implementing stronger risk management practices. Over
time, the company repaid the government bailout and regained stability in the financial
sector, marking one of the most dramatic recoveries in corporate history.
2) Analysis of the Case
AIG’s downfall was a result of excessive risk-taking, particularly in its Financial Products
division, which insured mortgage-backed securities (MBS) through credit default swaps.
When the U.S. housing market collapsed, AIG was unable to meet its obligations, leading to
a liquidity crisis. The government bailout saved AIG from bankruptcy, but the company had
to undergo a significant transformation to regain its position.
Key turning points in AIG’s recovery included:
• Government intervention through financial assistance.
• Selling off non-core business units to repay debt.
• Revamping leadership to restore confidence.
• Strengthening risk management and regulatory compliance.
3) Decision Making
A) Identification of Problems
AIG faced multiple problems that led to its downfall:
1. Overexposure to High-Risk Financial Products: AIG’s Financial Products division
sold a large volume of credit default swaps, exposing the company to significant
liabilities when the housing market collapsed.
2. Lack of Proper Risk Management: The company underestimated the risks
associated with insuring mortgage-backed securities, leading to massive losses when
the market turned.
3. Excessive Leverage & Liquidity Crisis: AIG relied heavily on short-term funding,
which dried up during the financial crisis, leaving the company unable to cover its
obligations.
4. Reputation Damage and Loss of Investor Confidence: The crisis led to a
significant decline in AIG’s stock price, and investors lost trust in the company’s
ability to manage risk.
B) Diagnosing Areas Responsible for the Problem
1. AIG Financial Products Division: This unit played a major role in selling credit
default swaps without proper reserves, exposing AIG to massive financial risk.
2. Leadership and Corporate Governance: Poor decision-making and a lack of
oversight allowed excessive risk-taking.
3. Regulatory Gaps: AIG was engaging in financial practices that were not well-
regulated at the time, leading to unchecked risk accumulation.
4. Market Conditions: The collapse of the housing market triggered a chain reaction
that significantly impacted AIG’s financial stability.
C) Development of Strategies to Resolve the Problem
To recover from the crisis, AIG had to implement multiple strategies, including:
1. Government Bailout and Financial Support:
o The U.S. government provided an emergency bailout package of $182 billion
to prevent AIG’s collapse and stabilize the financial system.
o The bailout included loan guarantees and capital injections, allowing AIG to
meet its short-term obligations.
2. Asset Sales & Restructuring:
o AIG sold off non-core assets such as its aircraft leasing unit (ILFC) and its
Asian insurance business (AIA Group) to raise capital and repay the bailout
funds.
o It focused on its core insurance business to create a more sustainable and risk-
averse company.
3. Strengthening Risk Management & Compliance:
o The company implemented stricter internal controls to prevent excessive risk-
taking.
o It changed its business model to focus on traditional insurance rather than
speculative financial products.
4. Leadership Overhaul and Corporate Governance Improvements:
o The company replaced key executives and introduced new leadership to
restore trust.
o Increased transparency in financial reporting to regain investor confidence.
D) Evaluation of Each Strategy
Each strategy played a crucial role in AIG’s recovery, but they had their own pros and cons:
1. Government Bailout and Financial Support:
o Pros: Provided immediate liquidity and prevented a financial collapse.
o Cons: Increased government oversight and public criticism.
2. Asset Sales & Restructuring:
o Pros: Allowed AIG to raise capital and become more financially stable.
o Cons: Reduced the company’s market presence and potential for future
growth.
3. Strengthening Risk Management & Compliance:
o Pros: Ensured long-term sustainability and prevented future financial
mismanagement.
o Cons: Required a cultural shift and long-term implementation.
4. Leadership Overhaul and Corporate Governance Improvements:
o Pros: Helped rebuild trust and improve strategic decision-making.
o Cons: Took time to see the results, as trust had been severely damaged.
E) Selection of the Best Strategy
A combination of all four strategies was required for AIG’s successful recovery. The
government bailout provided immediate financial relief, while asset sales helped in
repaying debts and stabilizing the balance sheet. Implementing stronger risk
management policies ensured future sustainability, and leadership changes helped
restore credibility in the financial market.
Ultimately, AIG’s ability to execute these strategies allowed it to repay the government
bailout by 2012 and re-establish itself as a leading global insurance firm.
4) Question and Answer
Question:
What were the key mistakes AIG made that led to its financial collapse, and what were the
most effective strategies used in its recovery?
Answer:
AIG’s biggest mistakes included:
1. Overexposure to credit default swaps that were linked to risky mortgage-backed
securities.
2. Inadequate risk management in assessing and mitigating the financial risks of these
derivative contracts.
3. Excessive reliance on short-term funding, which caused a liquidity crisis when
markets crashed.
4. Weak corporate governance that allowed reckless financial decision-making
without proper oversight.
The most effective recovery strategies were:
1. Government bailout, which provided immediate financial relief and prevented a
collapse.
2. Asset sales, which helped AIG repay debts and focus on its core insurance business.
3. Stronger risk management, which prevented future financial mismanagement.
4. Leadership and governance improvements, which helped rebuild trust and
confidence in the company.
By implementing these strategies, AIG not only survived the financial crisis but also repaid
its bailout funds and successfully re-established itself as a major player in the insurance
industry.
