AIG penned credit standard exchanges on the more $five hundred billion during the possessions
But it is actually this new $78 mil during the borrowing default swaps to the multiple-markets collateralized debt obligations-a protection backed by financial obligation repayments regarding residential and you will industrial mortgage loans, household guarantee loans, and more-you to definitely turned-out most troublesome. AIG’s difficulties had been made worse by fact that they were you to definitely-way bets. AIG did not have any offsetting ranks who make money in the event that its exchanges inside market shed money.
Bonds Financing Cycles From Tale
McDonald and you can Paulson’s analysis indicated that there clearly was far more into the state than the financing default exchanges. Ties financing forgotten the business a great deal of money since really.
Securities financing is a common economic exchange in which one organization borrows a protection away from another and supply in initial deposit out of security, always cash, to your bank.
Say, for-instance, you work with a finance having a giant resource within the IBM. There’ll continually be factors individuals need certainly to borrow the IBM shares, referring to a basic answer to make some extra cash on the fresh new inventory you may have, McDonald states. AIG try primarily lending away ties kept because of the its part lifetime insurers, centralized courtesy a good noninsurance, securities financingfocused subsidiary.
Companies that give securities usually get that money security and you may dedicate they when you look at the things short-term and you can apparently safe. However, AIG spent heavily within the high-yield-and you can higher-risk-possessions. It incorporated property supported by subprime domestic mortgage loans.
They’d this propensity to buy a house, McDonald says. Discover this notion you to a residential property expenditures was in fact secure because the brand new securities had good AAA credit rating. Leer más