Once admired for its rapid growth and sterling credit rating, AIG has become the poster child for the subprime mortgage crisis. When the housing market started to go bust, the company claimed to have impeccable risk management models in place.
But it quickly became clear that AIG actually had huge exposure to bad mortgages, especially through the tens of billions of dollars worth of insurance contracts, called credit default swaps, that it had written on bundled securities.
When the insurer's losses started mounting in 2008, its credit rating was cut and the counterparties on those swaps demanded collateral. Investors fled, fearing that AIG would go bankrupt or get taken over by the government. In the end, the Treasury took an 80% stake in the company and granted it a massive bailout.(Note: a 1-for-20 reverse split in July 2009 is reflected in the chart.)
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