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19

SEPTEMBER 2008:
THE BAILOUT OF AIG

CONTENTS

“Current liquidity position is precarious”...........................................................
“Spillover effect” .................................................................................................
“Like a gnat on an elephant”..............................................................................

Nine billion dollars is a lot of money, but as AIG executives and the board examined
their balance sheet and pondered the markets in the second week of September ,
they were almost certain  billion in cash could not keep the company alive through
the next week. The AIG corporate empire held more than  trillion in assets, but

most of the liquid assets, including cash, were held by regulated insurance sub-
sidiaries whose regulators did not allow the cash to flow freely up to the holding
company, much less out to troubled subsidiaries such as AIG Financial Products. 
The company’s liabilities, especially those due in the near future, were much larger
than the  billion on hand.
On Friday, September , , AIG was facing challenges on a number of fronts.

It had to fund . billion of its own commercial paper on that day because tradi-
tional investors—for example, money market funds—no longer wanted even short-
term unsecured exposure to AIG; and the company had another . billion coming
due the following week. On another front, the repo lenders—who had the comfort

of holding collateral for their loans to AIG (. billion in mostly overnight fund-

ing) —were nonetheless becoming skittish about the perceived weakness of the com-
pany and the low quality of most of its collateral: mortgage-related securities. 
On a third front, AIG had already put up billions of dollars in collateral to its
credit default swap counterparties. By June of , counterparties were demanding
. billion, and AIG had posted . billion. By September , the calls had
soared to . billion, and AIG had paid . billion—. billion to Goldman
alone—and it looked very likely that AIG would need to post billions more in the

near future. That day, S&P and Moody’s both warned of potential coming down-
grades to AIG’s credit rating, which, if they happened, would lead to an estimated

 billion in new collateral calls. A downgrade would also trigger liquidity puts that
