The bailout of American International Group (AIG) during the 2008 financial crisis became one of the most controversial episodes of the era, sparking outrage over the use of taxpayer funds to rescue a private corporation. AIG, a global insurance giant, was on the brink of collapse due to its exposure to credit default swaps (CDS), a financial product that played a central role in the crisis.
AIG’s Role in the Crisis
AIG’s troubles stemmed from its Financial Products division, which sold credit default swaps as a form of insurance against defaults on mortgage-backed securities. As the housing market boomed, AIG expanded its CDS business without adequately assessing the risks. When the housing market collapsed, AIG faced an avalanche of claims it couldn’t cover.
By September 2008, AIG had suffered losses exceeding $20 billion, and its credit rating was downgraded. These events triggered collateral calls that the company was unable to meet, pushing it to the edge of insolvency.
The Bailout
Fearing the systemic impact of an AIG collapse, the U.S. government stepped in with an $85 billion emergency loan, later expanded to $182 billion. The bailout was designed to stabilize AIG and prevent a domino effect on financial institutions that were heavily intertwined with the insurer.
Critics, however, questioned the fairness of the bailout. AIG used part of the funds to pay its trading partners, including Goldman Sachs and other major banks, at full value—despite calls for these banks to accept losses. The revelation that AIG executives received millions in bonuses during the bailout period added fuel to public outrage.
Reforms and Accountability
The AIG bailout exposed flaws in regulatory oversight and the moral hazard of rescuing “too big to fail” institutions. It underscored the need for stronger financial regulations, leading to the introduction of the Dodd-Frank Act in 2010. While AIG eventually repaid its bailout funds with interest, the episode remains a symbol of the excesses and failures of the pre-crisis financial system.
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