What was the rationale for the Fed lending billions of dollars to the insurance company American International Group (AIG)?
A) The Fed knew it would receive a high return on the loan.
B) The Fed was following a long-time precedent in rescuing top insurance companies.
C) If AIG collapsed,the insurance industry would as well.
D) The money AIG owed to banks posed a systemic risk.

Question

Quizplus · Accepted Answer

The money owed by AIG posed a systemic risk as several banks were highly exposed to AIG's financial products. If AIG collapsed, the default of its obligations could have led to a domino effect on other financial institutions, potentially triggering a wider economic crisis. Therefore, the Fed decided to lend money to AIG to prevent its collapse and stabilize the financial system. The Fed believed that the cost of inaction would be much higher than providing the loan.

What Was the Rationale for the Fed Lending Billions of Dollars