Impact of Financial Crisis 2008 on Financial Institutions

Abstract

Insurance sector is mainly affected by financial crisis due to failure of other sectors such as banks where insurance companies has put their guarantee on different securities and its investments in other sectors faced huge losses. AIG suffered from a liquidity crisis when its credit ratings were downgraded below "AA" levels in September 2008. AIG affected due collateral demand of $100 billion by counter parties on forward contract and currency swapping. The company’s liquidity position become too weak to get support from Government in form of bailout package to pay out its debt obligation and meet the collateral demands by counter party. In 2008 leverage position of company reach its high that was due increased debt (borrowing from Government) and losses from operations and investments depleted the equity amount. Same case with the Lincoln national corporation and Hart Ford financial services in 2008 the due losses from operations and other investments the equity amount decrease too much, so too get bailout package from US Government. These both companies have retuned back the bailout amount to treasury department but AIG has still $50 billion outstanding. In 2010-11 the performance of companies is good to some extent and debt to equity ratio of above all companies is decreased and unrealized losses are now recovered.

Keywords: Financial Crisis, Debt-to-Equity, Federal Reserve Bank, Insurance Sector.