1. Downgrade risk
Risk type: external (and internal)
Whole risk downgrade risk can be considered an external factor, it is mainly influenced by the state of the company itself, and hence it shares characteristics with internal risk factors. The downgrade significantly impacted the ability of AIG to cover collateral demands. It must have been taken into consideration that in a worst case scenario downgrade risk is likely to follow when other risk factors increase. Similar considerations should have applied to risks concerning market confidence in AIG.
2. Bailout related risk
Risk type: external
One of the possible risks that financial institutions on the brink of failure may face is the reluctance of the government to help them. Considering the size and type of company AIG is however, it was unlikely that if no other alternatives were viable the US government would refuse to bail them out. However, one must also note that the terms on which the bailout happens are also risks, in the case of AIG the government took over control of the majority of the company (almost 80%) (Andrews, 2008).…
