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Mark-to-Market Accounting with AIG

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1. The argument is that market-to-market accounting caused AIG to record huge unrealized losses. These losses led to a downgrade in the quality of AIG stock. The downgrade and frozen credit market led to eventual bailout. So, do you agree that the accounting rules contributed to AIG's demise?

2. The government said that AIG was "too big to fail." It was concerned that if AIG declared bankruptcy, then individuals holding personal insurance as well as other investments would have no insurance and would be in danger as the financial and liquidity crisis deepened. But many felt that the federal government should not be investing in publicly traded companies. There is risk in the marketplace, and one such risk is that occasionally businesses go bankrupt. Should the federal government have bailed out AIG, especially when it had not rescued Lehman Brothers and had let Merrill Lynch be taken over by Bank of America?

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Mark-to-Market accounting is reviewed in the case study for American International Group, Inc.

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1. The argument is that market-to-market accounting caused AIG to record huge unrealized losses. These losses led to a downgrade in the quality of AIG stock. The downgrade and frozen credit market led to eventual bailout. So, do you agree that the accounting rules contributed to AIG's demise?

This argument is not valid because the real reason that AIG failed was because it engaged in the use of collateralized debt obligation (CDO) wherein the bank used these CDOs to place all of their different types of debt in one bundle that included risky debts as well as safe debts. This led to mortgage-based securities engaging in CDOs, which held subprime loans, and these were insured through AIG in what was called credit default swaps. It was these subprime loans and credit default swaps that resulted in the downfall of the housing ...

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