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AIG

Written by the Fiveable Content Team • Last updated September 2025
Written by the Fiveable Content Team • Last updated September 2025

Definition

AIG, or American International Group, is a major insurance corporation that was at the center of the 2008 financial crisis. As a large provider of insurance and financial services, AIG's near-collapse had significant implications for the Federal Reserve System's role in stabilizing the economy.

5 Must Know Facts For Your Next Test

  1. AIG was one of the largest insurance companies in the world, providing a wide range of insurance and financial products, including credit default swaps.
  2. The collapse of the U.S. housing market and the resulting subprime mortgage crisis led to massive losses for AIG, which had insured many of these risky mortgage-backed securities.
  3. The Federal Reserve intervened to provide an $85 billion bailout to AIG in 2008 to prevent its failure, which was seen as a threat to the entire financial system.
  4. The AIG bailout was controversial, as it was perceived as a government-funded rescue of a company that had taken on excessive risk and contributed to the financial crisis.
  5. The AIG case highlighted the concept of 'too big to fail,' where certain financial institutions are deemed so important to the economy that their collapse would have catastrophic consequences.

Review Questions

  • Explain how the AIG bailout by the Federal Reserve was connected to the Federal Reserve's role in the financial system.
    • The AIG bailout was a direct intervention by the Federal Reserve to prevent the collapse of a major financial institution, which was seen as a threat to the stability of the entire financial system. As the lender of last resort, the Federal Reserve stepped in to provide emergency funding to AIG, recognizing that its failure could have triggered a wider economic crisis. This action highlighted the Federal Reserve's role in mitigating systemic risk and maintaining the overall health of the financial system, even if it meant bailing out companies that had taken on excessive risk.
  • Describe how the AIG bailout raised concerns about moral hazard in the financial industry.
    • The AIG bailout was criticized for creating a moral hazard, where financial institutions may be incentivized to take on excessive risk, knowing that they will be protected from the consequences by government intervention. The perception that AIG was 'too big to fail' suggested that large, interconnected companies could engage in risky behavior without fear of the full impact of their actions. This raised concerns that the bailout could encourage similar behavior in the future, as financial institutions might expect similar government support in times of crisis, potentially leading to a more fragile and unstable financial system.
  • Analyze how the AIG case highlighted the Federal Reserve's role in addressing systemic risk in the financial system.
    • The AIG case demonstrated the Federal Reserve's critical role in addressing systemic risk in the financial system. By intervening to bail out AIG, the Federal Reserve recognized that the company's failure could have had far-reaching consequences, potentially triggering a domino effect that could have destabilized the entire financial system. This action underscored the Federal Reserve's responsibility as the lender of last resort, to provide emergency funding and stabilize the financial system during times of crisis. The AIG case also highlighted the challenges faced by policymakers in balancing the need to prevent widespread economic disruption with the concerns over moral hazard and the potential for creating an environment where large institutions feel protected from the consequences of their actions.