AIG in Hindsight

Robert McDonald and Anna Paulson

Journal of Economic Perspectives, 2015, vol. 29, issue 2, 81-106

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.

JEL-codes: G01 G22 G28 G33 H81 (search for similar items in EconPapers)
Date: 2015
Note: DOI: 10.1257/jep.29.2.81
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Citations: View citations in EconPapers (20)

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Working Paper: AIG in Hindsight (2015)
Working Paper: AIG in Hindsight (2014)
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