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The Rescue of American International Group Module B: The Securities Borrowing Facility

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Abstract

In 2008, American International Group (AIG) was among the largest insurance corporations in the world and maintained a profitable securities lending program. However, AIG invested much of the cash collateral received from counterparties in residential mortgage-backed securities, whose value began to collapse rapidly and unexpectedly, creating liquidity strain for AIG when borrowers returned their securities. Because of these strains, credit downgrades, and losses, in September, the company sought assistance from the Federal Reserve which, on October 6, 2008, approved the establishment of the Securities Borrowing Facility by the Federal Reserve Bank of New York (FRBNY). The FRBNY agreed to loan as much as $37.8 billion to AIG to return cash to securities borrowers, accepting as collateral the investment-grade securities that AIG had lent to those securities borrowers. SBF The facility allowed AIG to borrow funds to repay securities borrowers and mitigate liquidity constraints. Its operations were terminated following the creation of the Maiden Lane II facility.

Suggested Citation

  • Jeffereis, Devyn, 2021. "The Rescue of American International Group Module B: The Securities Borrowing Facility," Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 3(1), pages 63-82, April.
    • Handle: RePEc:ysm:ypfsfc:3133
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    File URL: https://elischolar.library.yale.edu/cgi/viewcontent.cgi?article=1146&context=journal-of-financial-crises
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    Keywords

    AIG; collateral reinvestment; residential mortgage-backed securities; Securities Borrowing Facility (SBF); securities lending;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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