How did credit default swaps destabilize A.I.G.?
Date of (Near) Failure: Tuesday, September 16, 2008 Until it was partially nationalized in September 2008, American Insurance Group (A.I.G.) was the largest insurance company in America, with over $100 billion in annual revenue. Although many of its core insurance businesses were healthy and stable, A.I.G had issued $527 billion worth of credit default swaps to support mortgage-backed securities (MBSes). Credit default swaps are a special type of insurance, where the buyer pays for a guarantee of payment if a third party defaults on a loan. Unlike conventional insurance, you don’t have to own the asset being securitized to buy a credit default swap. In this way, buying a credit default swap is similar to betting that something will fail. So if the value of a mortgage-backed security lost value, particularly because of defaults on the mortgages in the security, the issuer would pay whoever took out insurance. These kinds of derivative products are not inherently problematic, because whe
