AIG in Hindsight

The near-failure on September 16, 2008, of American International Group (AIG) was an iconic moment in the financial crisis. Two large bets on real estate made with funding vulnerable to bank-run-like dynamics pushed AIG to the brink of bankruptcy. AIG used securities lending to transform insurance c...

Full description

Saved in:
Bibliographic Details
Published in:The Journal of economic perspectives 2015-04, Vol.29 (2), p.81-105
Main Authors: McDonald, Robert, Paulson, Anna
Format: Article
Language:English
Subjects:
Asset management
Bank assets
Bankruptcy
Capital gains
Cash
Central banks
Collateral
Credit default swaps
Credit insurance
Derivatives
Economic crisis
Economic statistics
Economic theory
Financial crisis
Financial securities
Financial services
Group life insurance
Insurance companies
Insurance industry
Life insurance
Lines of credit
Liquidity
Loans
Mortgages
Payments
Real estate
Securities lending
Studies
Subprime lending
Subsidiaries
Subsidiary companies
Symposia: The Bailouts of 2007–2009
Treasuries
U.S.A
Writedowns
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:The near-failure on September 16, 2008, of American International Group (AIG) was an iconic moment in the financial crisis. Two large bets on real estate made with funding vulnerable to bank-run-like dynamics pushed AIG to the brink of bankruptcy. AIG used securities lending to transform insurance company assets into residential mortgage-backed securities and collateralized debt obligations, ultimately losing at least $21 billion and threatening the solvency of the life insurance companies. AIG also sold insurance on multisector collateralized debt obligations, backed by real estate assets, ultimately losing more than $30 billion. These activities were apparently motivated by a belief that AIG's real estate bets would not suffer defaults and were “money-good.” We find that these securities have in fact suffered write-downs and that the stark “money-good” claim can be rejected. Ultimately, both liquidity and solvency were issues for AIG.
ISSN:0895-3309
1944-7965
DOI:10.1257/jep.29.2.81