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Why was AIG in danger of insolvency in the aftermath of the subprime mortgage crisis? Why...

Why was AIG in danger of insolvency in the aftermath of the subprime mortgage crisis? Why (and how) was AIG saved by the government while other companies affected by the credit crunch weren't?

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The major reason for the danger of insolvency of AIG was the Collateralized Debt obligation (CDO) which was used by all large investment banks at that time. Various kinds of debt including sub-prime loans were bundled into the CDO. AIG had insured these Collateralized Debt obligations (CDO) against default by means of a new financial product defined as credit default swap. When the sub-prime crises loomed large and there were foreclosures and failure to repay, AIG ended up facing losses of upto $25 billion.

The government concluded that if allowed to fail, AIG was too big to the economy and that the US economy would collapse totally if AIG failed. It was too big to fail. Hence the US Federal reserve gave loans upto 80% of the AIG's equity to save it.

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