Working Paper: NBER ID: w21108
Authors: Robert L. McDonald; Anna Paulson
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.
Keywords: AIG; financial crisis; securities lending; credit default swaps
JEL Codes: E00; G01; G18; G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| AIG's securities lending activities (G24) | AIG's financial losses (G33) |
| AIG's securities lending activities (G24) | AIG's liquidity issues (G33) |
| AIG's securities lending activities (G24) | AIG's solvency issues (G33) |
| AIG's issuance of credit default swaps (G33) | AIG's financial losses (G33) |
| AIG's issuance of credit default swaps (G33) | AIG's liquidity crisis (F65) |
| Downgrade of AIG's credit rating (G28) | AIG's collateral demands (G52) |
| AIG's collateral demands (G52) | AIG's liquidity crisis (F65) |