AIG Bailout
September 19, 2008, filed under News and Rumors
There are a lot of pros and cons regarding the AIG bailout. Here are some of the both sides
AIG needs a bridge loan, not a bail-out. The company faces a liquidity crisis, not a solvency problem. Its core insurance operations, both in the US and abroad, are financially sound, and it can raise more than $20bn though orderly asset sales. For these reasons, a bridge loan – from the federal government if sufficient private capital is not forthcoming – will not mean a bail-out. A temporary bridge loan will prevent further rating agency downgrades, which would require AIG to post billions of dollars in additional collateral, and which would likely prove fatal.
AIG operates in approximately 130 countries, and has more than 100,000 employees. It provides credit protection to tens of thousands of financial institutions and other companies around the world. Its failure would pose systemic risk to the US and international financial systems.
AIG has opened markets all over the world and, for more than three decades, stood at the vanguard of the liberalisation of the global trade in services. Its stock is owned directly or indirectly by millions of Americans. And it has contributed significantly to US gross domestic product directly and indirectly over the four decades of its existence.
Greenberg also added that weakened risk management controls was the one brought AIG to its current state. AIG has not been considering profitability and therefore letting its financial business twhurl out of control. If later known that private capital is helpless to rescue AIG, a temporary federal bridge loan would be an answer, instead of a federal bailout.
Today, the government was forced to commit $85 billion to stop the collapse of AIG, another in a growing series of events that includes Bear Stearns, Lehman Brothers, Fannie Mae and Freddie Mac. These actions stem from failed regulation, reckless management, and a casino culture on Wall Street that has crippled one of the most important companies in America. The focus of any such action should be to protect the millions of Americans who hold insurance policies, retirement plans and other accounts with AIG. We must not bail out the management and speculators who created this mess. They had months of warnings following the Bear Stearns debacle, and they failed to act.
Furthermore, McCain promotes “effective regulation,” which may be a contradiction in terms, and an investigation. If he means an investigation by Congress, experience doesn’t suggest that anything very constructive will come of it. As for the “speculators,” I’m not sure who he has in mind, but denunciation of “speculators” seems to be mandatory these days.
Responding to the AIG loan by the Federal Reserve, Palin was “disappointed that taxpayers are called upon to bail out another one”.
Joe Biden shifted his opinion a day after stating that the federal government should not come to the rescue of insurance giant AIG. He said that he would need to get more details on the terms of the $85 billion bailout.
“The truth is I don’t know what the bailout is yet. It looks like they’re lending them a little bit of money. I don’t know what they’ve done, I haven’t had a brief on it. I haven’t spoken to the Secretary of the Treasury.”
It was a considerable difference to his response on the Tuesday before.
“No, I don’t think they should be bailed out by the federal government, I’ll tell you what we should do, we should try to correct the problems that caused this. And what’s caused this? The profligate tax cuts to the very, very wealthy that John [McCain] wants to continue. What has caused this is the failure to have regulation…It’s this government’s policies that have caused [the middle class] to get in great trouble.”
Prior to Biden’s comments on Wednesday, Barack Obama released a statement saying that any arrangement should protect families that count on the company’s insurance.
“It should bolster our economy’s ability to create good-paying jobs and help working Americans pay their bills and save their money. It must not bail out the shareholders or management of AIG.“
A spokesman for the Delaware senator released a statement Wednesday aligning Biden with Obama.
“Joe Biden made it clear that nobody likes bailouts, and we should never have been put in this deep hole as a country. Taxpayers shouldn’t have to be asked to clean up another mess. But here we are. Senator Obama and Senator Biden agree that whatever happens, the Fed needs to make sure it protects the families that count on insurance, bolsters our ability to create good-paying jobs, and helps working Americans pay their bills and save their money. The answer isn’t to bail out the shareholders or management of AIG.”
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