Securities Lending and the Untold Story in the Collapse of AIG

Mercatus Working Paper, May 2014

82 Pages Posted: 10 May 2014

See all articles by Hester Peirce

Hester Peirce

affiliation not provided to SSRN

Date Written: May 1, 2014

Abstract

American International Group, Inc. (AIG), a large insurance company, received a massive bailout during the financial crisis in response to difficulties centered on the company’s multifaceted exposure to residential mortgage-backed securities. The company is back on its feet, albeit in more streamlined form and with a new overseer — the Federal Reserve. This paper focuses on a piece of the AIG story that is rarely told — the role of the company’s securities-lending program in imperiling the company and some of its insurance subsidiaries. The paper argues that regulatory responses to AIG have been inapt. AIG did not need another regulator, but better risk management. The markets would have conveyed that message clearly had regulators not intervened to ensure AIG’s survival. This paper adds the missing piece to the AIG story in an effort to challenge the notion that more regulatory oversight for companies like AIG will prevent future crises.

Keywords: securities lending, American International Group, AIG, insurance regulation, Dodd-Frank, financial regulation, market discipline, financial crisis, Federal Reserve, bailout, credit default swaps, derivatives, insolvency

JEL Classification: G1, G2, G3, H1, H7, K2, N2, N8

Suggested Citation

Peirce, Hester, Securities Lending and the Untold Story in the Collapse of AIG (May 1, 2014). Mercatus Working Paper, May 2014, Available at SSRN: https://ssrn.com/abstract=2435161 or http://dx.doi.org/10.2139/ssrn.2435161

Hester Peirce (Contact Author)

affiliation not provided to SSRN

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