What was once the unthinkable occurred on September 16, 2008. On that date, the federal government gave the American Investment Group - better known as AIG (NYSE:AIG) - a bailout of $85 billion. In exchange, the U.S. government received nearly 80% of the firm's equity. For decades, AIG was the world's biggest insurer, a company known around the world for providing protection for individuals, companies and others. But in September, the company would have gone under if it were not for government assistance. High Flying The epicenter of the near-collapse of AIG was an office in London. A division of the company, entitled AIG Financial Products (AIGFP), nearly led to the downfall of a pillar of American capitalism. For years, the AIGFP division sold insurance against investments gone awry, such as protection against interest rate changes or other unforeseen economic problems. But in the late 1990s, the AIGFP discovered a new way to make money. A new financial tool known as a collateralized debt obligation (CDO) became prevalent among large investment banks and other large institutions. CDOs lump various types of debt - from the very safe to the very risky - into one bundle. The various types of debt are known as tranches. Many large investors holding mortgage-backed securities created CDOs, which included tranches filled with subprime loans. (For more on this concept, check out our Subprime Mortgage Meltdown special feature.) The AIGFP was presented with an option. Why not insure CDOs against default through a financial product known as a credit default swap? The chances of having to pay out on this insurance were highly unlikely, and for a while, the CDO insurance plan was highly successful. In about five years, the... ... middle of paper ... ... And The Federal Reserve_.) Conclusion AIG's bailout has not come without controversy. Some have criticized whether or not it is appropriate for the government to use taxpayer money to purchase a struggling insurance company. In addition, the use of the public funds to pay out bonuses to AIG's officials has only caused its own uproar. However, others have said that, if successful, the bailout will actually benefit taxpayers due to returns on the government's shares of the company's equity. No matter the issue, one thing is clear. AIG's involvement in the financial crisis was important to the world's economy. Whether the government's actions will completely heal the wounds or will merely act as a bandage remedy remains to be seen. To learn more about bailouts such as this one, be sure to read our related article, Top 6 U.S. Government Financial Bailouts.
...o turn their securities back into AIG and demand billions of dollars. AIG was faced with a problem and they had to start asking subsidiary insurance companies to liquidate their pension and insurance holdings so they could cover their losses. If this happened those customers would have received a fraction of the money due to them and would ensure a global crisis. Of all the people complaining about AIG, Goldman-Sachs was doing it the most frequently and the loudest. An audit of AIG showed that they had no liquidity to pay off the bulk of what they owed so the Federal government issued a bail out of $80 billion which later elevated to $200 billion. Goldman-Sachs received the largest percentage of that $200 billion and would have torched the entire country in order to get that money that felt they deserved; and the housing-market bubble was just at the beginning of it.
“Too big to fail” is a theory that suggests some financial institutions are so large and so powerful that their failure would be disastrous to the local and global economy, and therefore must be assisted by the government when struggles arise. Supporters of this idea argue that there are some institutions are so important that they should be the recipients of beneficial financial and economic policies from government. On the other hand, opponents express that one of the main problems that may arise is moral hazard, where a firm that receives gains from these advantageous policies will seek to profit by it, purposely taking positions that are high-risk high-return, because they are able to leverage these risks based on their given policy. Critics see the theory as counter-productive, and that banks and financial institutions should be left to fail if their risk management is not effective. Is continually bailing out these institutions considered ethical? There are many facets that must be tak...
The attacks of 9/11 resulted in history’s longest stock market shut down since the 1930s. The New York Stock Exchange remained closed for six days after the attacks. Furthermore, Davis (2011) reports that upon reopening, the New York Stock Exchange fell almost seven hundred points, the biggest one day loss in history. Additionally, Jackson (2008) reports a 14% decline in the Dow Jones, a loss the Dow still felt almost a year later. But, it was American Airlines and United Airlines that experienced the greatest loss. Following the reopening of the stock market, American experienced a 39% decline and United experienced a 42% decline (Davis, 2011). However in face of discouraging numbers, Jackson (2008) reports that the U.S. markets rebounded second only to Japan, showing the great economic resilience of the U.S. While the stock markets present a bleak outlook immediately following the attacks, the financial loss is far from reassuring.
Not only were millions of Americans been put out of work due to these manager’s actions, the American financial markets themselves were pushed to the brink of collapse. Despite the fact that the global financial markets, in reality, are not perfectly efficient, there is a corrective mechanism built into the day-to-day trading in the market. When prices are driven down by large sells, either by large investors or a movement in a stock, there are usually new buyers for these stocks at the cheaper price. Managers of...
The presence of systemic risk in the current United States financial system is undeniable. Systemic risks exist when the failure of one firm may topple others and destabilize the entire financial system. The firm is then "too big to fail," or perhaps more precisely, "too interconnected to fail.” The Federal Stability Oversight Council is charged with identifying systemic risks and gaps in regulation, making recommendations to regulators to address threats to financial stability, and promoting market discipline by eliminating the expectation that the US federal government will come to the assistance of firms in financial distress. Systemic risks can come through multiple forms, including counterparty risk on other financial ...
“Section 1342 of the ACA makes taxpayers responsible for bailing out insurance companies if the need to do so arises.” (MacKenzie, Tragic Problems With the (Un)Affordable Care Act). Although tax payers are legally obligated to finance federal programs such as the ACA, there are many who do not believe this is fiscally responsible. “Economist Laurence Kotlikoff estimates that average rates of taxation would have to rise 56% to cover projected increases in federal expenditures.” (MacKenzie, Tragic Problems With the (Un)Affordable Care Act). Therefore the American tax payers will never be able to supply the projected increases in this federal program, which makes national bankruptcy that much more likely to
Charles H. Keating Jr. has been the focus of criminal investigations by the Federal Bureau of Investigation, the Internal Revenue Service, the Justice Department, The Securities and Exchange Commission, and the House Banking Committee for a six-year shadow of the nation’s biggest savings-and loan debacle. The federal government proclaims that he fraudulently managed California’s Lincoln Savings into its closure, and in the process profited for himself and his family an estimated thirty-four million dollars. Consequently, taxpayers may suffer a loss of two billion dollars. The federal government is suing Keating, his family and associates for one billion dollars.
damaged credit, the companies are taking a financial risk by financing them. Considering that for
Roben, F., & Paula, D., (2010). When it comes to its role in the financial crisis, goldman sachs
Then came the question, should the employer be the one responsible for providing health insurance. While everyone on the panel could agree that our health care system in 2008 was broken, most seemed opposed to the alternative solution of universal healthcare. There is an incentive to the company to offer health insurance to a human being that may receive the opportunity to receive health insurance from another company. However, taking health insurance responsibility away from the employer and making it the government’s responsibility would increase availability and possibly eliminate freedom of
The financial crisis in 2008 hurt the automotive industry hard, causing many manufacturing facilities to shut down. GM and Chrysler both entered bankruptcy, and Congress decided to give government aid to the failing companies. They received the aid through the Troubled Asset Relief Program and Ford was helped through the Term Asset-Backed Securities Loan Facility. In 2013, the government sold the last of its shares in GM. The firms have survived and are back on their feet, although Chrysler was taken over by Fiat in
... middle of paper ... ... The forced liquidation of some $3 trillion in private label structured assets has been deprived from the financial markets and the U.S. economy has obtained a vast amount of liquidity that the banking system simply cannot restore. It is not as easy to just assign blame within these cases, however it is noted that the credit rating agencies unethical decisions practices helped add onto the financial crisis of 2008 and took into account the company’s well-being before any other stakeholders.
Irish people will never forget the financial crisis of 2008 in Ireland. A lax regime that let bankers be reckless, an over-dependence on the construction industry and little regulation harmed Irelands economy greatly. However, it is important that Ireland learns from its self-inflicted mistakes and re-builds its institutions. The economy has shown signs that it is improving and Ireland completed its EU-IMF bailout in December 2013.
Secured loans from many banks but it topped up those secured loans with risky, unsecured
...nces discussed above. Right now, the global economic is recovering, but the study of reasons of the crisis still teaches many countries a lesson on how to build a solid financial system and how to deal with other macroeconomic problems.