ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Monday, March 30, 2009

Behind the scenes at AIG

A One of the interesting thing about the AIG explosion is how little most of us who are chattering in the media about the bailout and the bonuses (including me) actually know about why the whole thing blew up.  If you haven't read it (and I don't think we've remarked on it here yet), a great place to start is The AIG Bailout by Bill Sjostrom (No. Kentucky).

Unlike most of us (we?) contract law types, Bill understands "credit default swaps" and he takes the reader through the decisions that led The World's Largest Insurance Company into the abyss.  He also takes a crack at what needs to be done to salvage what's there.  Here's the abstract:

On February 28, 2008, American International Group, Inc. (AIG), the largest insurance company in the United States, announced 2007 earnings of $6.20 billion or $2.39 per share. Its stock closed that day at $50.15 per share. Less than seven months later, however, AIG was on the verge of bankruptcy and had to be rescued by the United States government through an $85 billion loan. Government aid has since grown to $200 billion. AIG's stock currently trades at less than $1.00 per share.

The Article explains why AIG, a company with $1 trillion in assets and $95.8 billion in shareholders' equity, suddenly collapsed. It then details the terms of the government bailout, explores why it was undertaken, and questions its necessity. Finally, considering a likely legacy of AIG is increased regulation of credit default swaps, the Article describes the current regulatory landscape for CDSs, advocates restoring Securities and Exchange Commission power to regulate them, but cautions against regulating before the CDS market has had a chance to self-correct. 

[Frank Snyder]

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