Aig and Crisis

Pre-crisis business model (talk about traditional underwriting business)

Being the fourth largest company in the world, AIG Insurance (“AIG”) serves commercial, institutional, and individual customers that need property-casualty and life insurance, as well as provide a variety of other services that are an expansion of the insurance business. AIG also has companies that provide individuals with retirement services, financial services, and asset management services globally.

AIG boasts of a very solid business model that has grown over the years and stayed in touch with the needs of the average consumer. There are more than 714,000 agents and brokers today that are offering AIG insurance to their clients. AIG Insurance is very much in touch with its consumer base and continues to make improvements to the business model to meet the demands of its clients. For instance, in the last few years AIG has made it possible for their brokers to quote and bind insurance policies over the Internet in a matter of minutes. The reason that AIG insurance has gone this route is because the company as a whole is aware that convenience goes a long way with the average individual in need of insurance.

AIG Financial Products (“AIG FP”) was first started by Joe Cassano in 1987 and it biggest business was the sale of so-called plain vanilla products like interest rate swaps. Such swaps allow participants to bet on the direction of interest rates and, in theory, insulate themselves from unforeseen financial events.

Entry into the CDS market

Ten years ago, an idea from J.P. Morgan changed the profile of the derivatives that Mr. Cassano traded. Derivatives specialists from J.P. Morgan came calling with a novel idea. Morgan proposed the following: AIG should try writing insurance on packages of debt known as “collateralized debt obligations.” CDO’s were pools of loans sliced into tranches and sold to investors based on the credit quality of the underlying securities.

The proposal meant...