Chapter 10 AIG: Two Roads to Ruin

Between 2005 and 2008, AIG made two strategic mistakes that threatened the company’s survival. One involved credit default swaps350 (CDS) and the other securities lending. Their toxic effects were hidden, at first, due to healthy U.S. real estate markets, but converged in late 2007 and, subsequently, led to the lion’s share of AIG’s $99.3 billion loss and desperate need for cash in 2008. Had it not been for diagnostic efforts of the Federal Reserve (the Fed) and U.S. government, along with bailout funding worth $182.5 billion, these errors could have been fatal, requiring AIG to file for bankruptcy.

Of the two mistakes, the larger one involved the indiscriminate use of CDS by AIG Financial Products (AIGFP), a ...

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