Bailout of American International Group

Document Type:Research Paper

Subject Area:Finance

Document 1

In relation to this, it refers to a decline in the value of bank capital and conditions imposed by regulators, bank supervisors, or banks themselves that require banks to hold more capital than they previously would have held (Ryder, 32). Credit crisis occurs because of two major things. First, the bank runs that leads to closure, merging or takeover by the private sector of one or more financial institutions. Secondly, the large scale government assistance of important financial institutions that mark the start of a string of similar outcomes for other financial institutions. Governments’ response to credit crisis is usually intended to enhance the safety of financial institutions. Despite the massive profits that were made from these dealing in previous decades, they proved to be the main problem that caused financial crunch to the company.

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AIG argumentations The governments participation in the bailing out of this company led to numerous and heated debates in relation to the expenditure of public funds. The problems that were being experienced by this company were viewed to be in groomed hence, no need for the government to infuse massive billions in it. These caused a public outrage in relation to the interests of the government in the company’s operations. The Company’s financial products division had made contracts with financial institutions. This created unanticipated and dramatic liquidity needs for it. The company had invested about 60% of the cash collateral it had received from securities borrowers in the very mortgage-backed securities whose value was precipitously declining (Kidwell, 221). The government channeled a large portion of the funds ($60 billion), not to help AIG but to save various large banks, including Goldman Sachs.

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These institutions were paid full price on contracts whose value was known to be a deep discount from that. These contracts were never listed or traded on any organized exchange that revealed daily prices but were valued based on competing and divergent estimates by small group of sophisticated firms involved in the market. According to Mitchel et al. , the bailout for AIG was within the jurisdiction of the federal government. This is because, the key role of government is to provide an organized system by which people lives as a nation in peace, safety, and prosperity. It helps the society and business to function effectively. Therefore, it plays an important role in economic development. Many investors could have had concerns with the institutions and hence, avoid them leading to the disruption of their services (Madura, 21).

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For instance, the greatest institutions that could have received the ripple effect of the failure to bail it out could have been financial institutions like Goldman Sachs and Deutsche Banks. Banks had invested a lot of capital in the operations of this company due to their mutual understanding and relationship that had grown for decades. Therefore, the collapse of this company (AIG) could have placed some of the institutions like Goldman Sachs and Deutsche Banks in liquidity related issues making it hard to carry out their mandated operations by the government. Beneficiary institutions in the bailing out of AIG However, the bailing out of AIG impacted positively to most of its counterparts. Therefore, the company did not hedge its risks in order to increase its profitability.

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The subsidiary only wrote the insurance but did not hedge risks by acquiring offsetting assets. This would have acted as a protective measure that could have allowed the company to receive cash from its counterparty that could have been sufficient to meet AIG’s cash collateral obligations for its CDS obligations. Similarly, the bailing out of AIG was not warranted because of the nature in which they were conducting their business operations. Governments set rules and regulations that enable business entities to effectively carry out their operations smoothly. Cambridge: Cambridge University Press, 2012. Print. Greenberg, Maurice R, and Lawrence A. Cunningham.  The AIG Story. J. Arthur.  The Panic of 2008: Causes, Consequences and Implications for Reform. Cheltenham: Edward Elgar, 2010. Print.  Hidden in Plain Sight: What Really Caused the World's Worst Financial Crisis and Why It Could Happen Again.

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