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68 In September of 2008, the world witnessed the largest financial loss since the Great Depression. e financial crisis nearly brought down every financial institution on Wall Street. e center of the storm is financial derivatives that were written against subprime mortgages. CASE IN POINT: AIG In 2007, insurance giant AIG insured $61 billion mortgage backed securities with exposure to subprime mortgages. rough its credit default swap, AIG transferred default risk from its counterparties to the insurance company itself and therefore guaranteed the value of mortgage backed security would not decline. When the value of the mortgage backed securities deteriorated in 2007, the company was forced to post mounting losses. On November 7, 2007, AIG reported $352 million in unrealized losses from its credit default swap portfolio. On December 5, 2007, the insurance company disclosed $1.15 billion in further unrealized losses, a total of $1.5 billion through November. In February 2008, AIG corrected the total unrealized losses for 2007 to $5.96 billion. In March 2008, this number once again was adjusted to $11.5 billion. In 2008, losses at AIG continued. On May 8, 2008, AIG reported $9.1 billion unrealized losses by March, for a grand total of $20.6 billion since 2007. On August 6, 2008, AIG posted $14.7 billion unrealized losses by May, for a grand total of $26.2 billion. By November 10, 2008, AIG had estimated $33.2 billion in total unrealized losses from credit default swap contracts. AIG also agreed to put up collateral if the value of the mortgage backed securities deteriorated or AIG became less creditworthy. When the mortgage backed security market turned against its positions, AIG was also forced to meet collateral calls. Beginning in the summer of 2007, AIG's counterparties began demanding that AIG put up collateral. In August 2007, Goldman Sachs demanded that AIG post $1.5 billion in collateral to cover some of its exposure. AIG privately agreed to post $450 million. Late October 2007, Goldman asked AIG to post another $3 billion in collateral. AIG privately agreed to post $1.5 billion. On February 28, 2008, AIG disclosed that it had posted $5.3 billion in collateral since 2007. On May 8, 2008, AIG disclosed that it had posted a total of $9.7 billion in collateral. On August 6, 2008, AIG reported a total of $16.5 billion in collateral. In September I N D U S T R Y I N S I G H T / D R . K A T H E R I N E Q I N AN ECONOMIC THREAT Financial Leverage in Credit Default Swaps