AIG in Hindsight
Journal of Economic Perspectives
vol. 29,
no. 2, Spring 2015
(pp. 81-106)
(Complimentary)
Abstract
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.Citation
McDonald, Robert, and Anna Paulson. 2015. "AIG in Hindsight." Journal of Economic Perspectives, 29 (2): 81-106. DOI: 10.1257/jep.29.2.81Additional Materials
JEL Classification
- G01 Financial Crises
- G22 Insurance; Insurance Companies; Actuarial Studies
- G28 Financial Institutions and Services: Government Policy and Regulation
- G33 Bankruptcy; Liquidation
- H81 Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
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