Abstract
In 2008, AIG found itself on the brink of failure and required the Federal Reserve to step in with billions of dollars of taxpayer money. The causes of AIG’s collapse have been described in numerous articles and official reports since then. Albeit some nuances, all analyzes point to AIG’s credit default swap (CDS) activity as the major contributing factor. The purpose of this paper is to discuss how theoretical frameworks on finance can explain the collapse associated with the CDS exposure. In Part I, I will briefly summarize AIG’s downward spiral. Part II looks at two different theoretical frameworks that could help explain this distress, the Efficient Capital Market Hypothesis (ECMH) and KATHARINA PISTOR’s Legal Theory of Finance (LTF). Finally, Part III will attempt to draw lessons for the future based on the theoretical approaches that have been discussed.
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