Ch$.14$ LearningCurve: Macroeconomic Challenges

Question Value: $35$

Score: $255/300$

During the housing boom between $2003$ and $2007,$ the American International Group $($AIG$),$ the biggest issuer of credit default swaps, sold several trillion dollars of these swaps with only a few billion dollars in capital to back them up$.$ During the financial crisis, AIG could not cover the losses it had insured and went bankrupt. This happened because AlG:

overestimated the risk.

gave out too many loans.

overestimated the amount of money in its reserves.

underestimated and mispriced the risk.

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