Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

Most generous of all was the resolution of the CDS portfolio, which was accomplished by buying out the dangerous CDO on which AIG had written insurance. In effect, together with the collateral they had already claimed from AIG, the counterparties received payment at 100 percent of par on $62.2 billion in toxic mortgage-backed securities, the market value of which was closer to $27.2 billion. How little they would have been worth if AIG had been driven into bankruptcy is anyone’s guess. In any case, the subsidy to the counterparties and their clients clearly ran into the billions. Nor was it only the American financial system that benefited. In the course of the bailout, the Fed made sure to leave in place the insurance contracts that AIG had offered to European banks to provide “regulatory relief.” If they had been voided, the Americans estimated that the European banks would have faced calls for at least $16 billion in additional capital. “For fear of shouting ‘Fire!’ in a crowded theater,” the New York Fed later told Congress, it thought it best not even to mention this potential fallout from AIG’s crisis to European regulators.