Bank Bailout

The Bank Bailout and Its Effect on the

American International Group

Abstract

The American International Group bank bailout is a story of devastating financial crisis and its costly aftermath. The story reads like a soap opera, not just because it was the largest bailout in history. All of the crucial elements are there, including greed, deception, destruction, and heartbreak. This paper will explore the impact of the recent government bailout on the American International Group. The underlying cause of the bailout as well as its expected results and its achieved results will be looked at.

The Bank Bailout and Its Effect on the

American International Group

In the fall of 2008, widespread panic overcame the American International Group (AIG) following the news of the failure of Lehman Brothers (Greider, 2010). In turn, credit markets froze. AIG, the biggest insurance company in the world, was bleeding capital and heading toward bankruptcy (Loomis, 2010). However, letting such a large, connected corporation fail was not a gamble the government was willing to take. Their motivation stemmed from concerns that this financial crisis could begin to trickle down into the small investments that were essentially safe (Karnitschnig, Soloman, Pleven, & Hilsenrath, 2008). Money market funds that had invested in AIG debt would be affected. In turn, a very damaging “ripple effect” would take result.

What caused the financial panic at AIG? AIG is known for their success with derivatives. AIG made its fortune during the housing bubble, where they were using hedging tools to make investors feel safe holding their assets using contracts based on mortgage backed securities (Greider). Unfortunately for them, the housing bubble burst. Meaning, housing securities dropped significantly in value and they needed capital to pay on these securities immediately.

Initially, AIG attempted to obtain funds from the private sector. AIG requested assistance...