The difficulties the authorities face in settling AIG's obligations spilled into the open as Ben Bernanke, Federal Reserve chairman, yesterday expressed anger with the company in an appearance before the Senate budget committee.
“If there is a single episode in this entire 18 months that has made me more angry, I can't think of one other than AIG,” he said. “AIG exploited a huge gap in the regulatory system. There was no oversight of the financial products division. This was a hedge fund basically that was attached to a large and stable insurance company.”
The crisis at AIG stemmed from its activities in the market for credit default swaps (CDS) – derivatives that function as debt insurance. AIG was particularly active in providing such guarantees for securities known as collateralised debt obligations (CDOs), bonds backed by debts such as subprime mortgages.