But it is actually the fresh new $78 billion for the credit default swaps for the multiple-business collateralized debt burden-a safety supported by personal debt repayments out-of residential and you will commercial mortgages, home guarantee finance, and-one proved very troublesome. AIG’s difficulties was made worse because of the proven fact that they were one to-way bets. AIG did not have one offsetting ranking that would benefit in the event that their swaps inside industry missing currency.

Ties Financing Series From Tale

McDonald and you may Paulson’s studies indicated that there clearly was so much more into disease than simply the financing standard exchanges. Bonds financing destroyed the firm a great amount of money due to the fact well.

Securities lending is a common monetary deal in which that business borrows a safety off yet another and gives a deposit regarding security, usually cash, toward lender.

Say, as an example, you focus on a funds that have a large resource inside the IBM. There’ll continually be reasons some one need to use the IBM offers, and this refers to a standard solution to create some extra cash on the fresh new inventory you have got, McDonald says. AIG was primarily credit away bonds stored by the their part life insurance vendors, centralized compliment of a good noninsurance, securities financingfocused part.

Firms that lend ties always top article bring that cash equity and purchase it within the some thing short-term and you may seemingly safer. However, AIG spent heavily in the higher-yield-and you may large-risk-property. So it provided possessions backed by subprime domestic mortgages.

They had it propensity to acquire a house, McDonald states. Discover this notion you to definitely a property investment was safer once the the newest ties had an excellent AAA credit history. (más…)