Question

What was the cause of AIG’s past problems? Explain in the context of assets and liabilities.

Answer 1

AIG was major seller of credit default swap at the time of 2008.it sold those credit default swaps in order to boost its profit margin. When the majority of the organisations to whom it has sold the credit default swaps were triggered by the bankruptcy of the borrower, invoked their credit default swaps on AIG.

AIG was very large so the demise of it, would have meant the contagion in the entire global economy because the most of the financial institution where major holders of debt and most of the mutual funds also hold AiG in their portfolio.

AIG swaps on subprime mortgages pushed it on the brink of bankruptcy as the mortgages tied to the swap defaulted AIG was forced to raise millions in capital and stockholders got wind of the situation and they sold their shares making it more difficult for AIG to cover the loss.

There was a huge liability mismatch and it was then bailed out by the Federal Reserve by an 85 billion two year loan which help prevent it bankruptcy and further stress on the global economy.