NATIONAL BUREAU OF ECONOMIC RESEARCH
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AIG in Hindsight

Robert L. McDonald, Anna Paulson

NBER Working Paper No. 21108
Issued in April 2015
NBER Program(s):The Corporate Finance Program

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.

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Document Object Identifier (DOI): 10.3386/w21108

Published: Robert McDonald & Anna Paulson, 2015. "AIG in Hindsight," Journal of Economic Perspectives, American Economic Association, vol. 29(2), pages 81-106, Spring. citation courtesy of

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