View the step-by-step solution to:

AIG, played a central role in the financial crisis by issuing swaps to investors in CDO tranches, promising to reimburse them for any losses on the

AIG, played a central role in the financial crisis by issuing swaps to investors in CDO tranches, promising to reimburse them for any losses on the tranches in exchange for a stream of premium-like payments. AIG was rated AAA in 2006. This credit default swap protection made the CDOs much more attractive to potential investors because they appeared to be virtually risk free, but it created huge exposures for the credit default swap issuers if significant losses did occur. Once investors lost faith in the quality of the protection offered by the CDS the demand for the risky tranches of CDOs fell off. This depressed the price of the underlying mortgage collateral. As the price of subprime mortgage collateral dropped the capital positions of financial institutions that were holding tranches of CDOs fell.

True or False

Sign up to view the entire interaction

Top Answer

Please find... View the full answer

solution to AIG.doc

AIG, played a central role in the financial crisis by issuing swaps to investors in CDO tranches,
promising to reimburse them for any losses on the tranches in exchange for a stream of premiumlike...

Sign up to view the full answer

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

-

Educational Resources
  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question
Ask a homework question - tutors are online