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Generally, the CDS are used to hedge the credit risk while during 2007-8 crisis, it...

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Finance

Generally, the CDS are used to hedge the credit risk while during 2007-8 crisis, it caused AIG to move to the brink of bankruptcy. AIG's swaps on subprime mortgages pushed the otherwise profitable company to the brink of bankruptcy. As the mortgages tied to the swaps defaulted, AIG was forced to raise millions in capital. As stockholders got wind of the situation, they sold their shares, making it even more difficult for AIG to cover the swaps. Generally, it is perceived that CDS leads to reduction of risk but in the above article, the CDS caused AIG to move towards the brink of bankruptcy. Explain how CDS led to a turmoil in AIGs financial performance

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