American International Group
AIG Credit Default Swap Crisis
Estimated impact: $182B
AIG's Financial Products division sold approximately $500 billion in credit default swaps on mortgage-backed CDOs without adequate reserves. When housing prices collapsed, AIG faced margin calls it could not meet, requiring a $182 billion federal bailout to prevent cascading counterparty failures.
Decision context
Whether to continue underwriting credit default swaps on mortgage-backed securities without posting collateral or building loss reserves against a potential housing downturn.
Decision anatomy
Red = risk factor present · Green = protective factor present
The analysis below was produced from the pre-decision document only — no hindsight. This is what the platform would have surfaced if it had been running in 2005.
“2005 Financial Products division strategy memo on CDS portfolio expansion targeting $500B notional value”
Source: AIG Financial Products Division (Joseph Cassano)
Red flags detectable at decision time
- CDS portfolio concentration in mortgage-backed securities
- Risk models assuming housing prices could not decline nationally
- No stress testing for correlated defaults
- Leverage ratios exceeding 100:1 on some positions
Cognitive biases the platform would have flagged
Hypothetical analysis
Decision intelligence would have flagged the extreme concentration risk and the foundational assumption that national housing prices could not decline simultaneously — an assumption contradicted by historical data from Japan (1990s) and regional US markets. The absence of correlated-default stress testing would have triggered immediate model risk warnings.
Biases present in the decision
★ Primary driver · Severity estimated from bias type and decision outcome
Toxic combinations
Reference class base rates
Across all 135 curated case studies in our library:
Lessons learned
- Selling insurance without reserves against tail risk is a business model that guarantees eventual catastrophe.
- Anchoring to AAA credit ratings on structured products masked the true default correlation risk.
- Counterparty risk concentration can transform a single firm's failure into a systemic crisis.
Source: Financial Crisis Inquiry Commission Report (2011); Congressional Oversight Panel, "The AIG Rescue" (2010) (SEC Filing)
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