文档介绍:By
Liu Yuxi
Tian Ruixuan
Wang Ruozhou
Wang Dong
Liu Ya
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Outline
AIG and its CDS business
How AIG collapsed
W of collateral posting obligations, inability to access the capital market, the credit rating agencies downgraded its debt rating in Sep , which triggered additional posting obligation.
The liquidity strains against the CDSs was amplified by liquidity strains arising from AIG's securities lending program.
Losses on AIG’s CDS contracts were $ billion.
On September 16, , the Federal Reserve loaned AIG $85 billion to bail it out in exchange of % of its equity.
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Why the bailout?
The consequences of Lehman Brothers bankruptcy
Chain reaction and would lead to the collapse of the entire financial system.
A bankrupt AIG could not pay off on those CDS contracts
Losses in the form of write-downs on CDS portfolios
Paralyze the credit markets
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Risk Exposure
”One-way” bet on CDSs. Most market-making financial firms typically both buy and sell CDSs to hedge any significant directional exposure, however, AIG only sold CDSs, it didn’t have any offsetting positions that would make money if its swaps in this sector lost money.
Intrinsic risk in CDSs. There is high correlation between default triggering events. Once some bonds start defaulting, other bonds are more likely to default. The risk increases exponentially.
Fail to assess the risk of MBS, CDOs and other mortgage market exposure. AIG relied excessively on a credit risk model that did not adequately account for both the sharp decline in the mortgage market and a downgrade of AIG’s credit rating.
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CDS: Credit Default Swap
CDS market was too big
Lack of regulation
No transparency
Different from insurance
Risk
1. Speculation: buy a CDS at a spread of 300 basis points, and sell the same CDS at a spread of 600 basis points in the next year.
2. Hedge: manage the risk of default which arises from holding debt
3. Arbitrage: