Fair Value and 2007-2008 Financial Crisis

Abstract

Extensive research has been conducted on the causes and driving forces of the financial crisis of 2007-2008. The research paper is an attempt to investigate the relationship between fair value and the crisis and to find a reliable answer to the research question. In the light of exploratory and qualitative research approach, the researcher conducted comprehensive assessment of the prior literature studies in an attempt to explore the degree of influence fair value had on the crisis. In addition to this, in-depth analysis of AIG and insurance sector's role in the crisis helped to infer that fair value exacerbated the crisis. The notion was supported by the analysis of selected financial aspects of AIG and its management decisions pertaining to overall investment portfolio management. In the lead of research findings, the researcher identified areas for further study and intellectual development in this discipline.

Key Words: The financial crisis of 2007-2008, relationship, fair value, qualitative research approach, prior literature studies, degree of influence, AIG, insurance sector, financial aspects, investment portfolio

ABSTRACTII

INTRODUCTION1

Background of the Study1

Research Question2

LITERATURE REVIEW3

Fair Value Concept3

Causes of the Crisis4

Government Policies4

Level of Interest Rate4

Mortgage-backed Securities5

Originators of Subprime Mortgage5

CDS Protection Sellers5

Role of Banking Institutions6

Role of the Insurance Sector6

AIG and the Financial Crisis7

Impact of Fair Value on Financial Crisis10

Role of the Federal Reserve System12

AIG in the Post-Financial Crisis17

Summary of Literature18

METHODOLOGY19

Research Design19

Research Approach19

Types of Data20

Data Collection Methods21

Limitations21

DATA ANALYSIS AND INTERPRETATION22

Financial Position and Financial Performance Analysis of AIG24

RESEARCH FINDINGS28

CONCLUSION29

Areas for Advanced Research29

REFERENCES31

Fair Value and 2007-2008 Financial Crisis

Introduction

The research paper aims at investigating the intended relationship between fair value and financial crisis of 2007-2008. The researcher develops a proper frame of work to set the direction for the research study. The research paper conducts exploratory and descriptive research in an attempt to find answer to the research question i.e. whether fair value contributed or exacerbated the financial crisis of 2007-2008. In the light of selected research approach, the research paper collects data and relevant information from authentic and reliable sources, which can lead to effective research findings. In addition to this, the research paper accesses reliable secondary data and key statistics in order to create valid research inferences and data interpretation on the possible impact of fair value on the financial crisis of 2007-2008. In the light of evidence collected from the prior literature and analysis of AIG's performance, the paper sums up research findings and identifies areas for advanced research.

Background of the Study

According to Harrington (2009), the founding stone for the crisis was bubble burst in the real estate industry that turned into nastiest financial and economic conditions in the world history. Since the Great Depression, global economy was hit with a serious and an unforeseen strike of the financial crisis of 2007-2008. The crisis provided a true picture of a populous economic concept i.e. tripling effect because there was a wave and cyclone of financial crisis that highly influenced the overall US financial industry (Wei et. al., 2013). On a global scale, the crisis hit hard to every industry and sector, ...