Question

During the 2007-2009 recession, the Federal Reserve Bank loaned $85 billion to AIG to prevent the large insurance company from filing for bankruptcy. Lehman Brothers filed for bankruptcy during the same week and did not receive any government assistance. The Federal government also insured loans to General Motors and Chrysler. In July, 2008, 5644 companies went bankrupt in the United States. That represented an 80% increase from the previous year. Should the federal government bail out some companies experiencing financial stress and possible bankruptcy while letting other companies go under?

How do each of the following relate to the financial crisis of 2007-2008: declines in real estate values, sub-prime mortgage loans, mortgage backed securities, AIG?

Answer 1

Answer :

Should the federal government bail out some companies experiencing financial stress and possible bankruptcy while letting other companies go under?

My genuine belief is that in specific conditions, yes there is a requirement for the government to bail a company out, while declining to bail others out. I think it relies upon the effect the company's disappointment would have on the nation. An enormous company, for example, General Motors utilizes countless individuals. The company would have failed and every one of those individuals would have lost their jobs, having a domino effect on the economy. The whole auto industry would have endured, including automotive, sales, service, and parts. A little company or a company whose conclusion would have little effect on the nation's economy ought not get a government bailout. Bail out ought to be controlled by the all out economic effect a conclusion would have on the nation's economy.

Different components are a company's capacity to reimburse the bailout, it's collateral, and it's risk assessment. When contrasting AIG with Lehman Brothers, AIG was viewed as a good risk and had collateral, while Lehman Brother's was most certainly not.

How do each of the following relate to the financial crisis of 2007-2008: declines in real estate values, sub-prime mortgage loans, mortgage backed securities, AIG?

Preceding the 2007-2008 financial crisis the banking institutions gave an enormous number of loans to borrowers that were moderately progressively 'risky' as in these borrowers were bound to default on their loans. This was alluded to as the sub-prime market. This brought about a fast increment in home costs (alongside housing market speculation) that was unsustainable (sometimes alluded to as a 'bubble'). This issue was additionally exacerbated by the issuance of mortgage backed securities, which packaged riskier mortgages together, and offered them to investors. In principle, this reduced the risk introduction that banks looked subsequent to giving these loans. This clear decrease in risk increased the measure of sub-prime loans made by the banks. In any case, this decrease in risk was a bookkeeping deception since the banks likewise made loans to the gatherings buying the mortgage backed securities.

When housing prices began to decay and people began to default on their mortgages (at first sub-prime borrowers) this reduced or totally eliminated the estimation of these mortgage backed securities. This caused the financial investors who held these securities to default on their loans to the banks that initially offered the mortgage backed securities (essentially the banks gave loans to the people who were purchasing the benefits they were selling). Accordingly, there was a significant 'credit crunch' as banks discounted the bad loans.

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