Economics, A.I.G

Financial Crisis AIG to blame?

After AIG got bailed out an argument on whether or not it was necessary started to spark up, mainly coming from the American tax payers upset that their hard earned money was going to a company that help put many of the problems that the U.S was facing. Although the taxpayers had the right to be mad, the bailout that A.I.G received was more then necessary, America could have went into a full-blown depression if its largest insurance company went under, North America wouldn’t be the only place to be hurt if AI.G went bankrupt, many company’s in Europe would have been drastically hit and more then likely go bankrupt as well.

To understand why the bail out was so necessary, you would first need to understand how the largest insurance company in North America almost went bankrupt. The two key terms that are said a lot when talking about A.I.G and the “housing bubble” are regulatory arbitrage and ratings arbitrage, more commonly know as taking advantage of some kind of loophole. As a World wide multinational insurance company with a reputation for being particularly well-run, A.I.G had a triple-A credit rating, the highest honor a business could have and only obtained by less than a dozen companies. This rating if obtained was believed to have close to zero chance of defaulting, and could get loans much easier and cheaper then competitor company’s with lower ratings. A.I.G exploited their triple-A rating by backing all of the mortgages, so it looked as if all of the bad sub-prime mortgages had a triple-A rating, but doing this shifted all of the risk from the banks onto A.I.G, in return A.I.G thought they were getting risk-free money and would never have to actually pay up. When a company insures against a flood or an earthquake it puts aside money in case the said risk does take place, but what hurt them badly was that they were so sure that the triple-A mortgages would never default they never put any money aside at all for them,...