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AIG in Hindsight

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  • 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.

Suggested Citation

  • Robert L. McDonald & Anna Paulson, 2015. "AIG in Hindsight," NBER Working Papers 21108, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21108
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. FSOC and Systemic Risk: Treasury's Report
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2017-11-20 20:14:14
    2. Stress Testing Financial Networks: The Case of CCPs
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2019-03-18 12:19:47

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    Cited by:

    1. Nathan Foley-Fisher & Borghan Narajabad & Stephane Verani, 2016. "Securities Lending as Wholesale Funding: Evidence from the U.S. Life Insurance Industry," NBER Working Papers 22774, National Bureau of Economic Research, Inc.
    2. Corradin, Stefano & Heider, Florian & Hoerova, Marie, 2017. "On collateral: implications for financial stability and monetary policy," Working Paper Series 2107, European Central Bank.
    3. Ralph S.J. Koijen & Motohiro Yogo, 2017. "Risk of Life Insurers: Recent Trends and Transmission Mechanisms," NBER Working Papers 23365, National Bureau of Economic Research, Inc.
    4. Allen, Linda & Tang, Yi, 2016. "What’s the contingency? A proposal for bank contingent capital triggered by systemic risk," Journal of Financial Stability, Elsevier, vol. 26(C), pages 1-14.

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    More about this item

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G2 - Financial Economics - - Financial Institutions and Services

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