There were financial crimes involved in the issue, which included the addition of $500 million to the company’s loan loss reserve. The company was in fact, not as successful as it claimed to be and many of its executives were also suspected to have been involved in financial frauds. The primary reasons that contributed to the downfall of the company were the bets placed on credit default swaps, the unrealistic accounting strategies of the company and the underlying financial crimes that prevented investors from predicting the downfall of the company.
Credit default swap is more like an insurance that would receive payments from the buyer makes payments and in the event of facing loss from debts or loans, the company would give a pay off. The company got itself into riskier financial products as it allowed collateralized assets groups and subprime mortgage pools to invest in credit default swaps, since it would not be possible to assess the real value of these groups. When there were sever losses in the housing market, most of the pools that the company had insured began to face losses. At the point where the company had to pay off almost all of its investors, the company was almost bankrupt. This also made evident that the company had shown its loss loan reserve values to be higher than it was.
When the financial crisis faced by AIG was under scrutiny, it was brought to light that the company had been warned twice before of its improper records and books. The liabilities that the company was subject to as a result of the financial products were not accounted for as necessary. The company had been warned of its book records and the assets valuation was reported as lacking in accuracy, failing to provide a clear understanding of the impact of its products on AIG’s finances. The accounting strategy that contributed considerably to the company’s downfall was the “fair-value” accounting