Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

A group within AIG specialized in pooling the high-quality Treasurys and other securities held by AIG’s insurance funds. It lent those assets to other investors in exchange for cash, a trade akin to a repo. AIG’s securities-lending business then looked to maximize returns by investing the cash it received from the securities loan in higher-yielding but more risky mortgage-backed securities. Perversely, the securities lending office of AIG began to take those risky bets in 2005 precisely at the moment that AIG’s own Financial Products division decided it was too risky to continue writing CDS on mortgage-backed securities. By the summer of 2007, AIG’s securities lending program had $45 billion invested in high-yield private label MBS. As the securitization business collapsed, those assets became virtually unsalable, leaving AIG scrambling to find funds with which to repay the securities borrowers who now wanted their cash back. In search of profit, a cash-rich insurance company sitting on a giant portfolio of high-quality securities had turned itself into a dangerously leveraged shadow bank with a serious maturity mismatch. And to make matters worse, it was dealing with some of the most heavy-hitting players in global finance.

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