Why the Bailout of AIG Necesary

Susan MatthewsMark Contreras

Sean FogliaRick 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.

• Derivative/Credit Default Swap reduction

• Market Derivatives=$144 Bo $23 B. of CDO Swapso $14 B. intermediations

Summary of AIG's derivative positions as of Sept. 30, 2011

AIG's Relationship with the U.S. Government

• AIGo Sold 100 Million

shares of common stock

• Treasury Departmento 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