What happened to AIG, formerly one of the world’s leading insurance companies?
Newspapers are calling it a bailout, but in this case the US looks more like an opportunistic investor. AIG ran aground because it did two stupid things. First, it made a lot of investments in illiquid mortgage backed securities that took a serious turn for the worst. Then, it did something really stupid. Not content to just invest in junk, it made big bets in the form of credit default swaps (CDS). CDS are insurance for bonds. AIG received a small premium over time to guarantee the value of all sorts of bonds, including the same kinds they held in their portfolio. Under the requirement of the CDS agreements, AIG would be required to post a HUGE amount of collateral against these bets if AIG’S credit rating ever declined. Keep in mind that they own mostly illiquid investments and that most likely cause of their credit declining would be losses in their investment portfolio… They really bet the farm — and lost. The US government (AKA you and I) has extended them a line of credit for $85
