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Why the Bailout of AIG
Necesary
Susan Matthews
Mark Contreras
Sean Foglia
Rick Ramirez
AIG Bailout economic reasons
• The AIG Bailout may not sit well with
taxpayers but the benefits out way the
costs
AIG will be able to pay off the
extended loans to tax payers
• AIG reduced loan amount from 68 to 51
billion by selling assets
• Nan Shan Life Insurance Co. in Taiwan =
2.15 billion (yesterday)
AIG and other companies that are
Nationalized will be forced to restructure.
• Restructuring will reduce systemic risk
• Taxpayers will not sell off company shares
in crisis
• Taxpayers are starting to sell off more
shares in the company
• Restructuring forces AIG to scale down
The Potential risks that surround the
insolvency of one of the largest insurance
companies in the world are numerous.
• Insurance policy holders around the world would be at risk.
• Because of the credit default swaps failure bondholders and
other entities could loose up to 400 billion
• Overnight disappearance of wealth leads to tightened credit
markets and deeper recessions
• Bank failure can lead to losses in uninsured deposits
• FDIC is dependent on taxpayer funds in crisis.
• Fed will have to loan more money to insolvent banks and
may
never recover the loans.
Moral hazard is a small price to pay to
prevent a second great depression
• Fed in first depression did very little
• 10% unemployment vs. 25%
• economy saw very little growth vs.
negative growth
• Great example to test economic theory.
Summary of AIG's derivative positions as of
Sept. 30, 2011
• Derivative/Credit Default
Swap reduction
• Market Derivatives=$144 B
o $23 B. of CDO Swaps
o $14 B. intermediations
AIG's Relationship with the U.S. Government
• AIG
o Sold 100 Million
shares of common
stock
• Treasury Department
o Sold 200 Million
shares of common
stock
Reducing Toxic Risk Assets
• Progress made in reducing portfolio size risk
• 86% of non-credit derivatives terminated or reduced
Why Was the AIG Bailout Important
• Henry Paulson did not wanted to save
Lehman Brothers and used “Moral
Hazard”
• Bush did not believe in a bailout
• Obama Administration with Timothy
Geithner felt bailout was necessary
Why Was the AIG Bailout Important
• The housing market failure
• The repeal of the Glass-Steagall Act
• Lack of government intervention during
the Great Depression
The Players Before the Bailout
The Players After the Bailout