AIG Financial Bailout: American International Group (AIG)

AIG Financial Bailout:

American International Group (AIG) Inc. is one of the biggest insurers worldwide that was bailed out by the U.S. government in 2008. The American government took control of this company in deal worth $85 billion that reflected the intensity of its concern regarding the threat a collapse could pose to the financial system. As part of the deal, the government effectively obtained a 79.9% stake at the firm in warrants known as equity participation notes. The emergency loan from the Fed was spread out within a period of two years with an interest rate of Libor and 8.5%.

The security of the emergency loan was the company's assets that included the profitable insurance businesses of AIG. While this security provided some protection to the Fed even with the ongoing sinking of the markets, the taxpayers were to reap huge profits through the equity stake if the company rebounded. On the other hand, American International Group used the loan to govern the process of selling some of its businesses in an orderly way and minimal disruption to the general economy (Karnitschnig et. al., 2008).

Impact of the Bailout on the Industry:

The financial bailout of American International Group was a history development given that the firm was not directly regulated by the federal government. The bailout had a major impact on the financial industry and the entire economy because it helped in transforming the American financial system. Through the initiative, the American government was deeply involved in the insurance and housing industries that were largely affected by effects of the 2008 -- 2009 global recession. This was evident from the fact that the government seized control of mortgage-lending companies like Freddie Mac and Fannie Mae as they nearly collapsed.

By rescuing the company, it effectively meant that the government rescued Bank of America, Morgan Stanley, Merrill Lynch, and Goldman Sachs as well as other European banks from huge losses. The reason for such impact is that these financial institutions played the derivatives game with the American International Group, a practice that places financial bets on future occurrences. As AIG lost its bets and eventually collapsed while its counterparts in the derivatives deals were made complete on their bets. The bailout by the federal government resulted in the payment of these counterparties 100 cents on the dollar. The positive impact of the move on the financial system was evident as the government committed to use taxpayers' money to pay for any burden to prevent the collapse of largest financial institutions in America.

Government's Intervention on Free Markets and Failing Businesses:

Several economies from different political ideologies have continued to argue on the reasons and extent with which governments should intervene in the operations of the free market. In the debate, socialist economists support more state ownership and control as they believe there is greater need for intervention whereas free market economists favor minimal government intervention (Sarjanuddin & Mamat, 2009). In most cases, the occurrence of a market failure is usually used as the reason for government intervention in a certain market. However, the causes of such failure and probable means to correct it are the main concerns of economists. The government's intervention in free markets is usually in the form of price controls, subsidies, regulations, wage controls, and bail outs.