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AIG and credit default swaps
Sept 2008· Crisis or event
Fact, law or dataA rule, statute, definition or measured number.
Insurer AIG nearly collapsed in September 2008 because its trading unit had sold insurance-like protection on mortgage bonds.
See it on the Money & Finance map →How it works
A credit default swap (CDS) pays the buyer if a bond defaults; the buyer pays yearly premiums, like insurance. AIG Financial Products, run largely from London, sold such protection on hundreds of billions of dollars of mortgage-linked bonds without reserves, relying on AIG's AAA rating. When those bonds fell and AIG was downgraded, its contracts required billions in collateral it lacked. On September 16, 2008, the Fed lent $85 billion; total support reached about $182 billion.
Why it matters
It showed how unregulated derivatives could carry mortgage losses into an insurer and on to the banks that bought its protection, and pushed standard swaps into clearinghouses.
Think of it like
Like an insurer writing flood policies across an entire floodplain with no reserves: profitable in dry years, ruinous when one storm hits everyone.
Facts, rules and data
The FCIC report, the Congressional Oversight Panel's June 2010 AIG report, and SIGTARP audits naming the banks paid in full, including Goldman Sachs and Société Générale.
Debates and risks
Whether those banks should have taken losses rather than full payment is still argued; the government ultimately booked a combined profit of about $23 billion.
Connections (4)
▸AIG and credit default swaps showed the danger of Options and other derivativesFact, law or data
The connection
AIG's Financial Products unit sold credit default swaps, insurance-like contracts paying out if bonds defaulted, on about $440 billion of debt, much of it tied to mortgages, without setting aside reserves. When its rating was cut and the bonds fell, buyers demanded collateral it could not post. Unregulated, uncleared derivatives had concentrated risk in one firm.
When and why
AIG Financial Products, run largely from London; the US government rescue began September 16, 2008, eventually committing about $182 billion.
How we know
The Financial Crisis Inquiry Commission report (2011), the Congressional Oversight Panel (2010) and AIG's filings; Dodd-Frank then required clearing and reporting for standard swaps.
Debates and risks
Whether the rescue was needed to prevent wider collapse, and whether paying trading partners like Goldman Sachs in full was justified.
▸AIG and credit default swaps was rescued with help from TARP bank bailout (2008)Fact, law or data
The connection
The Fed's September loan could not cover AIG's mounting losses, so in November Treasury used TARP to buy $40 billion of AIG preferred stock, later committing about $70 billion in all. That let AIG meet its swap obligations and avoid a failure that would have hit banks worldwide.
When and why
Washington and New York, November 10, 2008, restructured in March 2009; AIG became TARP's largest single recipient.
How we know
Treasury's TARP transaction reports and SIGTARP audits; the government sold its last AIG shares in December 2012.
Debates and risks
Critics, including the Congressional Oversight Panel, said the rescue told markets that giant firms would be saved; whether the eventual profit vindicates it is debated.
▸ISDA Master Agreement: the standard swap contract also governed the contracts behind AIG and credit default swapsFact, law or data
The connection
AIG's credit default swaps were signed under ISDA agreements whose credit support annexes required more collateral if AIG's rating fell or the insured bonds lost value. When both happened in September 2008, collateral calls reached tens of billions of dollars, which AIG could not meet without the Fed's rescue.
When and why
At AIG Financial Products, run largely from London, with counterparties such as Goldman Sachs and Société Générale, 2007–08.
How we know
The Financial Crisis Inquiry Commission report and the Congressional Oversight Panel's 2010 AIG report describe the collateral terms and calls.
Debates and risks
Whether the standard collateral terms helped by forcing early recognition of losses, or deepened the panic, is still argued.
▸AIG and credit default swaps exposed hidden risk in OTC derivatives: about $850 trillion notional (2025)Fact, law or data
The connection
AIG sold credit default swaps, an OTC product, on hundreds of billions of dollars of mortgage-linked bonds. Because these trades were private and lightly regulated, few knew how large AIG's exposure was. When AIG was downgraded, contractual collateral calls nearly broke it, threatening the banks that had bought its protection.
When and why
AIG Financial Products, run largely from London, sold most of its protection on mortgage-backed CDOs in 2004–06; the rescue began September 16, 2008.
How we know
The Financial Crisis Inquiry Commission report (2011) and Congressional Oversight Panel findings documented the trades and collateral calls.
Debates and risks
Whether better transparency alone would have prevented the damage, or the risk would simply have moved elsewhere, is debated.