Aig in Hindsight

41 Pages Posted: 20 Apr 2015 Last revised: 27 Apr 2015

Date Written: April 2015

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.

Suggested Citation

McDonald, Robert L. and Paulson, Anna L., Aig in Hindsight (April 2015). NBER Working Paper No. w21108. Available at SSRN: https://ssrn.com/abstract=2596437

Robert L. McDonald (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8344 (Phone)
847-491-5719 (Fax)

Anna L. Paulson

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312 322 2169 (Phone)

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