Question

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

(Note AIG American International Group was an insurance giant that suffered during the 2008 financial crisis).

Answer 1

American international group was a major seller of credit default swap at the time of 2008, when the great recession unfolded. It sold those credit default swap in order to boost its profit margin. Those credit default swap let it to the brink of bankruptcy. majority of organisation to whom it has told the credit default swaps were triggered by a bankruptcy of the borrower, invoked their credit default swaps on AIG. AIG was left with no money to to honour them all.

AIG was very large so the demise of AIG would have meant the contagion in the entire global economy because the most of the financial institution where major debtholders were of American international group, and most of the mutual fund have American international group in their portfolio.

American international group swaps on subprime mortgages post it on the brink of bankruptcy as the mortgages tied to the swap defaulted, American international group was forced to raise millions in captital and stockholders got wind of the situation and they begin to offload their shares and it was getting highly difficult for American international group to cover their losses.

there was a huge asset liability mismatch and it was then bailed out by the Federal Reserve for a 2 year loan which help it to prevent bankruptcy and further stress on the global economy.