Question

1.Why did the government rescue AIG?(elaborate on your answer)

2. How do insurance companies mange credit risk and liquidity risk (elaborate on your answer)

3. Should mutual funds be subject to more regulation (elaborate on your answer)

Answer 1

Establishing a supposed hardline against bailout over the weekend just a little time over 9 years since the Federal government gave American International Group Inc better known as AIG a bail out of dollar 85 bilion the US financial stability oversight Council decided that financial distress at the insurance giant no longer post a threat to United States financial stability The council voted to remove AIG from a list of systematically risky Institution of a known as that are too big to fail the epicenter of of the near collapse of AIG was an office in London a division of the company called AIG financial products a new financial told known as collateralized debt obligation became pregnant amount large investment banks in other large institutions it lamp various types of debts from very safe to very risky into one bundle the various type of debts known as tranches many large investors hold mortgage backed securities created collateralized debt obligation which included tranches filled with subprime loans. One large chunk insured collateralized debt publications came in the form of Banded Mod wages with the lowest rated tranches comprised of submarine loans AG believe that what is insured would never have to be covered or if it did it would be 18 significant amount but when foreclosures rose 2 incredibly high levels had to pay out on what it promised to cover this naturally caused a huge hit to its revenue accounting problems work the division also caused losses this intern lower its credit rating which caused the form to postpone lateral for its bondholders causing even more worries about the company's financial situation it was clear that I was in danger of solvency to prevent it the Federal government step. It was considered Too big to fail an incredible amount of institutional investors mutual fund pension funds and hedge funds both invested in and also where insured by the company in particular many investment banks that have collateralized debt obligations insured by AIG of losing billions of dollars money market funds generally seen as very conservative instrument without which risk attached. Negotiations for play taking place among companies and Federal officials what the next step shall be once it was the divine the company was true white you to global economy to be allowed to fill the Federal Reserve struck a deal with the management to save the company the federal reserve was the first to jump into the action is showing a loan in exchange for 79.9% of companies equity the total amount was originally listed at dollar 85 million and was to be paid over 2 years at the London exchange bank rate plus 8.5% points in terms of the initial deal has been reworked the federal and this Treasury Department have no and even more money to it bringing the total of estimate to dollar 115 Million.

Bailout has not come without controversy some have to decide whether or not It is appropriate for the government to use taxpayer money to purchase a struggling insurance company also the use of public funds to payout bonus no matter the issue one thing is clear AIG involvement in financial crisis was important to the world economy within the government action will completely heal the wounds on a merrily act as a bandage remedy remains to be seen

2. To deal with default risk life insurance companies typically investment securities with high ratings and the diversify amounts is security issues to reduce liquidity they die was the age distribution to to deal with default risk life insurance companies typically investment securities with high ratings and the diversify amounts is security issues to reduce liquidity they die was the age distribution of customers until fairly recently the management of credit risk was a topic that banks was supposed to be expert the traditional way of other such as insurance are also expert in liquidity and credit risk related to evaluation of market and investment risk today the need for to improve the management of credit exposures have come into sharp focus the scope of people commonly referred to what they talk about credit risk is there exposure to counterparty risk to the other Financial Institutions pre and post settlement risk liquidity risk in unwinding positions taken on default of in the management of investment risk is undertaken at arm's length by Asset Management divisions of the insurance third party fund managers in case of Asset Management on the need for credit policies committee is an independent credit analyst have historically been open to debate for two reasons first the Asset manager managers investment risk largely for the policyholders and not to the life insurance companies crop criteria count secondly the ability to measure and restrict credit exposure the justification for continuing to use a streamlined or light touch credit process have been Re considered in some cases the introduction of complex financial instruments tends to calls audit committees and policyholders to question the efficiency of the underlying credit risk management process. It involves go to make the investment decisions and avoid them and ask culture where decision making results in argument review limits regularly so that they are realistic and not accessible relation to the exposures concern diversify the research you receive and don't just rely on one supplier

3. Mutual fund when compared to other types of investments such as hedge funds have strict regulations in fact the US securities and exchange Commission has placed even greater Regulation and money market mutual funds to be implemented from 2016 the securities act of 1933 requires that investors receive specific information regarding securities offered by mutual funds for sale in public Market app also protects investors against fraud and Miz information in the sale of securities buy mutual fund the securities act of 1934 actually created the security exchange commission and give the commission jurisdiction over the entire securities industry the various acts and resulting regulations with the oversight provide a lot of benefits for investors of mutual fund first day give investors transparency all information on Holdings of mutual fund is publicly available so investors can understand their investments regulations also provide liquidity to invest in shares of mutual funds are assured daily liquidity in that redemption is required by the fund company on the date of investors train mutual fund is also required to have track record audited for accuracy the audited track record gives investors peace of mind that a fund stated return at home regulations provide safety to the investor additional e retail price retail Municipal money market funds will not be able to institutional investors institutional investors can invest in both Government and institutional money market fund both have a float 4 decimal