What’s more, McDonald and Paulson examined the assertion that the mortgage-backed securities underlying AIG’s transactions would not default. Securities lending, a less-discussed facet of the business, lost AIG $21 billion and bears a large part of the blame, the authors concluded. The company’s credit default swaps are generally cited as playing a major role in the collapse, losing AIG $30 billion.
“There were multiple moving parts.” Why Did AIG Really Fail? “AIG is a mystery to a lot of people and it’s very complicated,” McDonald says. How, exactly, did AIG get to the point of failure? In a recent paper, Robert McDonald, a professor of finance at the Kellogg School of Management, and Anna Paulson of the Federal Reserve Bank of Chicago, pull together disparate data and information to create an economic narrative of what went wrong. Nevertheless, many of us-economists included-remain fuzzy about what happened.
Both the Congressional Oversight Panel and the Financial Crisis Inquiry Commission produced detailed reports that included accounts of AIG, and the Federal Reserve Bank of New York made public a detailed account of its involvement. Because AIG’s near-failure was a prominent and iconic event in the financial crisis, it provided a touchstone for subsequent financial reform discussions, and a great deal of information about AIG and the rescue is in the public domain.
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