Federal Reserve Provides $85 Billion Emergency Loan to AIG, Eventually Growing to $182 Billion in Total Taxpayer Commitments to Bail Out Insurance Giant That Gambled on Credit Default Swaps, Followed by $165 Million in Executive Bonuses Paid to Employees Who Caused the Crisis

On September 16, 2008, just one day after allowing Lehman Brothers to file for bankruptcy, the Federal Reserve provided an $85 billion two-year emergency loan to American International Group (AIG) to prevent the insurance giant’s collapse and contain spreading financial contagion. In exchange for the loan, the Federal Reserve took ownership of 79.9% of AIG’s equity, effectively nationalizing one of the world’s largest insurance companies. At its peak, the Federal Reserve and Treasury Department committed approximately $182.3 billion in extraordinary assistance to AIG, making it the largest recipient of government financial assistance during the 2007-2009 financial crisis. The bailout occurred because AIG had become a massive seller of credit default swaps—exotic derivatives intended to insure against defaults on mortgage-backed securities—without posting adequate collateral, setting aside capital reserves, or hedging its exposure. When mortgage-backed securities began failing in 2008, AIG faced collateral calls it could not meet, threatening to trigger a cascade of failures across the global financial system as counterparties who had purchased AIG’s credit default swaps would face enormous unhedged losses.

The Financial Crisis Inquiry Commission’s January 2011 report determined that AIG failed and required government rescue “primarily because its enormous sales of credit default swaps were made without putting up the initial collateral, setting aside capital reserves, or hedging its exposure—a profound failure in corporate governance, particularly its risk management practices.” AIG’s credit default swaps lost the company approximately $30 billion, but the Commission also identified securities lending—a less-discussed business line—as losing AIG $21 billion and bearing substantial blame for the collapse. AIG’s Financial Products division, based in London and operating with minimal regulatory oversight, had written credit default swaps on approximately $440 billion in assets, including $57 billion tied directly to subprime mortgage-backed securities. The division operated with extraordinary autonomy from AIG’s main insurance operations, allowing a small group of traders to place bets that ultimately put the entire global financial system at risk while enriching themselves through annual bonuses tied to short-term trading profits rather than long-term risk management.

The scale and structure of the AIG bailout revealed complete government capitulation to financial industry demands, with taxpayers bearing all risks while AIG counterparties—including Goldman Sachs, Société Générale, Deutsche Bank, and other major banks—received 100 cents on the dollar for their credit default swap positions. The Federal Reserve and Treasury Department justified paying full value to AIG’s counterparties by claiming that any haircuts or negotiated settlements would trigger broader market panic and additional failures. However, this decision meant that taxpayers subsidized the reckless risk-taking of sophisticated financial institutions that had purchased AIG credit default swaps without adequately assessing AIG’s ability to perform. Goldman Sachs alone received approximately $12.9 billion in government funds through AIG counterparty payments, directly transferring taxpayer money to one of the most profitable and politically connected Wall Street firms. The decision to protect counterparties demonstrated that the bailout’s primary purpose was shielding major banks from their own risk management failures rather than protecting the insurance functions that AIG provided to ordinary Americans.

In March 2009, AIG announced it would pay its executives over $165 million in bonuses, with total bonuses for the financial products unit potentially reaching $450 million and company-wide bonuses totaling $1.2 billion. The bulk of these bonuses went to employees in AIG’s Financial Products division—the exact unit responsible for the credit default swaps that destroyed the company and required $182 billion in taxpayer bailouts. AIG executives and their defenders claimed the bonuses were contractually required “retention payments” necessary to keep employees who understood the complex derivatives positions that needed unwinding. This justification outraged the public and many lawmakers, as it meant the very employees whose reckless speculation had destroyed AIG and necessitated the largest corporate bailout in history were being rewarded with hundreds of millions in taxpayer-funded bonuses. Another $198 million in bonuses were paid in 2010, demonstrating that even after public outcry and Congressional hearings, the practice of rewarding failure with taxpayer funds continued.

The Congressional response to AIG bonuses revealed the limits of political accountability in the face of financial industry power. Both the House of Representatives and Senate adopted bills to tax AIG bonuses at rates of 90% or higher, but these bills were never reconciled and signed into law. The threatened taxation prompted some executives to voluntarily return bonuses—including 15 of the top 20 executives—but this voluntary approach meant that many recipients kept taxpayer-funded bonuses. The abandoned legislative effort demonstrated that even when public outrage over financial industry practices reached fever pitch and both chambers of Congress acted, the financial industry’s lobbying power and captured regulators’ resistance could prevent meaningful accountability measures from becoming law. The episode established a precedent that executive compensation at bailed-out firms would face minimal government restrictions despite taxpayer ownership stakes and enormous public subsidies.

Despite AIG’s failure being directly caused by fraud, misrepresentation to regulators, and reckless gambling with insufficient capital reserves—activities that would constitute criminal negligence or fraud in most contexts—not a single AIG executive faced criminal prosecution. CEO Martin Sullivan, CFO Steven Bensinger, and Financial Products head Joseph Cassano, who collectively earned hundreds of millions in compensation while driving AIG toward insolvency, faced no criminal charges. The Justice Department conducted no serious criminal investigation of AIG executives for securities fraud, making false statements to regulators, or the accounting manipulations that hid the firm’s deteriorating financial condition from investors and regulators. The Securities and Exchange Commission brought only limited civil enforcement actions focused on disclosure violations rather than the underlying fraud and risk management failures. The absence of criminal accountability meant that AIG executives who had profited enormously from reckless credit default swap sales that nearly collapsed the global financial system faced no jail time and retained the vast majority of their crisis-era wealth.

The AIG bailout structure demonstrated profound regulatory capture, as officials including Federal Reserve Chairman Ben Bernanke, New York Fed President Timothy Geithner, and Treasury Secretary Henry Paulson designed rescue terms that prioritized protecting major banks over taxpayers or accountability. The decision to provide $182 billion in government support while taking only 79.9% equity ownership—rather than 100% ownership or placing AIG into a government receivership with full control—meant that existing shareholders retained value and management maintained substantial autonomy. This structure contrasted sharply with how the FDIC handles failed banks, where regulators take complete control, wipe out shareholders, and replace management before using taxpayer funds for rescue operations. The preferential treatment of AIG revealed that different regulatory frameworks applied to institutions with sufficient political connections and systemic importance, creating a two-tier system where major financial institutions received taxpayer support with minimal government control while smaller institutions faced receivership and shareholder wipeout.

The government eventually sold its final AIG shares in December 2012, with the Treasury Department claiming taxpayers made a $22.7 billion profit on the AIG bailout when accounting for repayments, dividends, interest, and asset sales. Bailout defenders cite this outcome as vindication of the intervention and evidence of successful crisis management. However, this narrow accounting ignores the fundamental accountability failure and moral hazard created by the bailout. AIG executives and Financial Products division employees faced no criminal prosecution for reckless conduct that required $182 billion in taxpayer support. Counterparties like Goldman Sachs that had failed to properly assess AIG’s credit risk received full payment with taxpayer funds rather than facing market losses from their own risk management failures. The “profit” calculation ignores the opportunity cost of $182 billion in government funds, the implicit subsidy provided by government assumption of downside risk, and the moral hazard created by demonstrating that financial institutions could engage in reckless derivatives speculation, require massive bailouts, pay executives enormous bonuses with taxpayer funds, and face zero criminal consequences. The AIG bailout established that financial executives could gamble with the global economy, collect hundreds of millions in bonuses, cause systemic collapse requiring unprecedented government intervention, and retire wealthy without ever facing criminal prosecution or meaningful accountability.