AIG's federal bailout

AIG had sold enormous volumes of credit-default swaps, insurance-like contracts that paid out if mortgage-backed securities defaulted, relying on its top-tier credit rating rather than large cash reserves to back those promises. When rating agencies downgraded AIG in September 2008 as mortgage losses mounted, the downgrade itself triggered contractual demands for billions of dollars in collateral that AIG did not have on hand, pushing the company toward sudden insolvency. On September 16, 2008 — one day after Lehman Brothers' bankruptcy — the Federal Reserve, with full Treasury backing, authorized an $85 billion loan to AIG in exchange for a 79.9% equity stake in the company, judging that its failure risked far greater damage to a financial system already reeling from Lehman. The rescue eventually grew into a package worth $182.3 billion as further losses emerged, making AIG the single largest recipient of crisis-era government support. All the assistance was eventually repaid with interest by 2013, but the bailout remained one of the most politically contentious of the crisis given AIG's use of some funds to pay bonuses to the same trading unit that had caused the losses.