Several years ago, after American International Group (AIG) threatened some powerful players in the financial world
with deserved extinction, the Federal Reserve and the U.S. Treasury extended massive financial aid to American International Group in 2008. This assistance didn’t just keep AIG afloat – it helped AIG make good on insurance and other financial promises it extended to large banks and other parties in financial markets. Some of AIG’s largest counterparties were actually based in Europe. In effect, the American Taxpayer was standing behind American International Group.
Some of AIG’s largest exposures arose due to a financial instrument called a credit default swap. These instruments allow one party (the ‘protection buyer’) to hedge themselves, or otherwise bet against, any financial difficulty for another party (the ‘reference entity’) by effectively paying a form of insurance premium to a third party (the ‘protection seller’). AIG wrote massive amounts of protection against default on a wide range of instruments exposed to the housing crisis in the U.S., including huge pools of mortgage-backed securities and other derivatives. When AIG couldn’t make good on its own promises backing these instruments, our central planners stepped in and saved the company and its counterparties. That’s one reason we as taxpayers own a large majority stake in AIG today, a position on which we still have significant losses (to the tune of billions of dollars).