American International Group

2008

AIG is a diversified, multiline insurance conglomerate founded in 1919. Its clients today make up 87% of the Fortune Global 500 and 83% of Forbes 2000 companies. But it failed in 2008. It sold 92% of its equity and borrowed $182 billion in bailout money to get back on its feet.

In the late 1990s, when US accounting firms and credit rating agencies began promoting unsustainable financial practices, AAA/Aaa-rated AIG began selling money-making schemes to juice profits. First it offered insurance-like contracts to move bad assets off the balance sheets of troubled companies and dress up their accounting disclosures. By 2006, AIG wrote credit default swaps (CDS) on AAA/Aaa tranches of Collateralized Debt Obligations of Residential Mortgage Backed Securities (RMBS CDOs). The CDS would cover losses on defaulted securities. AIG also lent out (repoed) its collateral in treasury, taking in fees and reinvesting them in subprime Residential Mortgage Backed Securities.

AIG bet the house that AAA/Aaa rated securities were “money good.” The studies claimed a less-than 0.2% default risk. Post-hoc rating agency bond performance studies show, 30% of CDOs and 76% of RMBS from this era suffered losses. AIG’s counterparties included Goldman Sachs, Deutsche Bank, JP Morgan and Merrill Lynch, which would explain why AIG, as a nonbank outside Federal Reserve and Federal Deposit Insurance Corporation systems was thrown such a big life raft. Two of three Troubled Asset programs created by the Federal Reserve, Maiden Lane II and III, were for AIG. (Maiden Lane I was for Bear Stearns.) The Fed also suppressed interest rates, which helped AIG repay the Treasury and its counterparties.

References:
Wikipedia - American International Group