Did AIG sell credit default swaps?

Did AIG sell credit default swaps?

Most of the post-mortems of AIG focus on its selling of credit default swaps, which are financial instruments that act like insurance contracts on bonds. But when AIG’s credit rating was lowered, those collateral provisions kicked in—and AIG suddenly owed its counterparties a great deal of money.

Why did AIG fail in 2008?

AIG was one of the beneficiaries of the 2008 bailout of institutions that were deemed “too big to fail.” The insurance giant was among many that gambled on collateralized debt obligations and lost.

How did CDS cause the 2008 crisis?

Companies that traded in swaps were battered during the financial crisis. Since the market was unregulated, banks used swaps to insure complex financial products. Investors were no longer interested in buying swaps and banks began holding more capital and becoming risk-averse in granting loans.

Who bought the credit default swaps in the big short?

Burry closed the first deal on subprime credit default swaps with Deutsche Bank. He bought $60 million of credit default swaps from Deutsche Bank—$10 million each on six different bonds.

Did CDS cause financial crisis?

The exponential growth of the credit default swap (CDS) market over the past few years is well documented. The highly publicized government bailout of AIG brought the CDS market to the media forefront, and some observers have identified the CDS market as the primary cause of the financial crisis.

How much is AIG covered by credit default swaps?

Once some bonds start defaulting, other bonds are more likely to default. The risk increases exponentially. Credit default swaps written by AIG cover more than $440 billion in bonds 2. We learned this week that AIG has nowhere near enough money to cover all of those.

Why did AIG lose so much money on swaps?

AIG didn’t have any offsetting positions that would make money if its swaps in this sector lost money. McDonald and Paulson’s analysis showed that there was more to the problem than just the credit default swaps. Securities lending lost the company a massive amount of money as well.

Who are the companies covered by credit default swaps?

Of that, $400 billion was “covered” by credit default swaps. 2 Some of the companies that sold the swaps were American International Group (AIG), Pacific Investment Management Company, and the Citadel hedge fund. These companies didn’t expect all the debt to come due at once.

How much money does AIG have in CDs?

Credit default swaps written by AIG cover more than $440 billion in bonds 2. We learned this week that AIG has nowhere near enough money to cover all of those. Their customers-those banks and hedge funds buying CDSs-started getting nervous. So did government regulators.