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Dinakar
Stealth • 5m
The 2008 financial crisis - During the late 1990s, America was getting a huge inflow of foreign funds from Russia and many Asian countries. American banks naturally didn't want the money just lying around earning no interest, so they made it easier to get mortgages as a way to lend out this cash. These less than ideal loans were called sub-prime mortgages. Banks bundled thousands of these mortgages into a single bond known as a CDO and sold these bonds to other parties like pension funds, insurance companies and other banks to make more money. These CDOs were too risky to buy unless they were insured. This is where AIG comes in, they created an insurance to cover the costs of the bearer if the CDO failed. They were selling insurance on CDOs that had a very poor credit rating, effectively swapping it with the rating of AIG itself, this insurance policy was known as credit default swaps. Fast forward to 2007, all those sub-prime mortgages increased their adjustable rates.
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