AIG in Hindsight

Robert L. McDonald and Anna Paulson

No 21108, NBER Working Papers from National Bureau of Economic Research, Inc

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 that was vulnerable to bank-run like behavior on the part of funders 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 multi-sector 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: E00 G01 G18 G2 (search for similar items in EconPapers)
Date: 2015-04
New Economics Papers: this item is included in nep-his and nep-mac
Note: CF
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Citations: View citations in EconPapers (21)

Published as Robert McDonald & Anna Paulson, 2015. "AIG in Hindsight," Journal of Economic Perspectives, American Economic Association, vol. 29(2), pages 81-106, Spring.

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Journal Article: AIG in Hindsight (2015)
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