Question

During the Global financial crisis of 2008, AIG, an insurance company, had to be bailed out by the US government to prevent it’s collapse into bankruptcy.  Why did AIG have to be bailed out by the US government?  In retrospect, should the government have bailed AIG out?

Answer 1

Former Chairman of the Federal Reserve Ben Bernanke reported the American International Group's $182 billion bailout made him more angry than anything else in the recession. Bernanke said that while using cash from insurance policies of people, AIG took risks with unregulated products such as a hedge fund. Bernanke said that the government had no choice but to save it. Their demise would have created the same kind of economic collapse that took place in September 2008 when Lehman Brothers went bankrupt. AIG was so large that it would have an impact on the global economy as a whole. Of starters, AIG debt and bonds are invested by the $3.6 trillion money-market fund industry. AIG stock was owned by the majority of mutual funds. Also major holders of AIG's debt were financial institutions around the world. Subprime mortgage swaps from AIG pushed the otherwise profitable business to the brink of bankruptcy. AIG was forced to raise millions in capital as the mortgages tied to the default swaps. As the situation winded the stockholders, they sold their shares, making it even harder for AIG to cover the swaps.

Simply put, it was thought that AIG was too big to fail. A huge number of mutual funds, pension funds and hedge funds have been or have been insured by AIG, or both. In fact, there was a possibility that investment banks holding AIG backed CDOs would lose billions. Media reports, for example, indicated that Goldman Sachs Group, Inc. (NYSE: GS) had tied $20 billion to various aspects of AIG's business, although the company denied that.

Given that many had invested in AIG bonds, money market funds, generally seen as safe investments for individual investors, were also at risk. When AIG collapsed, it would send shockwaves through the already fragile money markets because we lost millions of dollars in investments