AIG and the Asteroid

The AIG bailout in 2008 was a monumental event in financial history, reflecting the systemic importance of the insurance giant to the global financial system. Prior to the crisis, American International Group Inc. (AIG) was considered a stable and profitable insurance company. However, AIG expanded into credit default swaps to boost margins, insuring bonds that were tied to subprime mortgages. The assumption was that the housing market was stable, and the diversification of the loan pools was considered sufficient to mitigate the risk. Unfortunately, when the housing market collapsed, these swaps pushed AIG to the brink of bankruptcy.

In September 2008, AIG’s credit rating was downgraded, triggering collateral provisions that required AIG to cover its debts immediately. On September 15, AIG’s stock price plummeted by 61%, and by the following day, the Federal Reserve stepped in with an $85 billion bailout. This decision was grounded in the belief that AIG’s collapse would have catastrophic effects on the financial system, given that AIG had insured over $500 billion in assets.

The Federal Reserve’s intervention was seen as a necessary step to prevent further financial instability. The bailout itself was controversial, with many questioning whether it rewarded reckless behavior and created a moral hazard. Nevertheless, the government deemed it necessary to avoid a total market collapse, considering the widespread reach of AIG’s financial dealings.

AIG’s difficulties were exacerbated by the fact that it had vastly underestimated the risk of the mortgage-backed securities it insured. It was later revealed that AIG had insured mortgage bonds that were over 95% subprime, significantly higher than the company’s assumption of 10%. This miscalculation was a key factor leading to the need for a bailout.

The AIG bailout is a stark example of the risks associated with complex financial instruments and the importance of understanding the underlying assets. It also underscores the government’s role in stepping in when companies deemed “too big to fail” face collapse, and the implications such interventions have for the financial market and the economy at large.

For a more detailed account of what led to the bailout and its ramifications, sources such as the Kellogg School of Management’s Insight article, Shortform’s comprehensive book summary, and Benzinga’s historical recap provide in-depth analysis and timelines of the events surrounding the AIG crisis.

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