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FRM Part I · FRM Exam Part I · Anatomy of the Great Financial Crisis of 2007-2009

Why was the US government's rescue of AIG in September 2008 considered necessary by authorities?

AIG had sold large volumes of credit default swap protection through its financial products unit. Falling asset values and downgrades triggered huge collateral demands it could not meet, and its failure would have hit many counterparties, so authorities rescued it to limit systemic contagion.

  1. AAIG's traditional life insurance subsidiaries were insolvent due to policyholder lapses
  2. BAIG's financial products unit had sold large amounts of credit default swap protection, and its collateral calls and potential default threatened many counterpartiesCorrect
  3. CAIG was the main issuer of subprime mortgages
  4. DAIG held most of the world's money market fund assets

Explanation

AIG Financial Products wrote CDS protection on multi-sector CDOs and other credit assets. Ratings downgrades and falling asset values triggered large collateral calls it could not meet. Its default would have caused losses at many counterparties, while the regulated insurance subsidiaries were largely not the source of trouble.

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