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Insurance Law

AIG’s Financial Distress: How Credit Default Swaps and the Lack of Regulation Brought Down an Insurance Giant and Implications for the Insurance Industry

The first of three articles in the Spring 2009 issue of New Appleman on Insurance: Current Critical Issues in Insurance Law is entitled “AIG’s Financial Distress: How Credit Default Swaps and the Lack of Regulation Brought Down an Insurance Giant and Implications for the Insurance Industry.” It was written by Paul Walker-Bright and Timothy P. Law of Reed Smith LLP. It answers the question it seems everyone is asking: How, could AIG, one of the largest insurance organizations in the world, fall so far and so quickly, to the point of bankruptcy and eventual bailout by the federal government? It discusses the causes of AIG’s financial distress, including a discussion of the credit default swaps that are at the root of the collapse, how they caused AIG’s downfall, and what the federal government has done to rescue (or at least to ease the transition of) AIG. Next, the article explores the implications of AIG’s fall for the insurance industry. It describes the relationship among AIG and its insurance subsidiaries and explains how that relationship, along with AIG’s announced plan for paying back the federal government’s massive loan (plus interest), may affect the ability of the insurance subsidiaries to operate in the future. The article also explores the effect on the broader insurance industry, including the real possibility of comprehensive federal regulation of insurance for the first time in the history of the United States.
 
 
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