AIG rescue (2008)
The Federal Reserve's emergency loan to AIG in September 2008, made necessary by collateral calls on its credit derivatives and returns under its securities lending program.
The AIG case shows that an insurance group can fall through activities that are not insurance. Its financial products unit had sold credit default protection on highly rated tranches of mortgage securitizations, contracts that required posting collateral as their value deteriorated or as AIG's rating fell. At the same time, the life insurance subsidiaries lent out their securities against cash and reinvested that cash in residential mortgage-backed securities that became unsellable. Both channels demanded liquidity at the same moment, while the insurance subsidiaries themselves remained solvent. The rescue was justified by the number of exposed counterparties, and the case gave rise to the designation of systemically important insurers and to tighter group supervision.
On September 16, 2008, the day after AIG's downgrade, the Federal Reserve authorized the New York Fed to lend it up to 85 billion dollars for two years at three-month Libor plus 850 basis points, in exchange for a 79.9 percent equity stake. On November 10, 2008, the package was revised with two vehicles set up to buy the securities lending assets and the CDOs AIG had written protection on.
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