Should the Feds Bail Out AIG?
AIG is the largest insurance company in the U.S. and it has asked the U.S. government for help.
AIG, the largest US insurance company by assets, is reported to have asked the Fed for a $40bn ‘bridge loan’ to tide it over while it sells assets and attracts new equity. Unless such support is forthcoming, the company fears a downgrade by the rating agencies before it can shore up its capital base. Such a downgrade could further weaken its balance sheet, leading to a downward spiral and possible bankruptcy.
Why is AIG in trouble? The sub-prime mortgage meltdown of course. AIG provided default insurance on mortgage backed securities and now that that market is melting down AIG is watching its own position melt down.
My first reaction is that the Feds should tell AIG, “Too bad.” My thinking is that if the company is so badly leveraged that it can’t save itself why should the taxpayer be on the hook? Further, if the company is merely in a tough spot that it can weather then let it weather the tough spot and learn a valuable lession. Sure letting AIG possibly fail would be unpleasant, to put it mildly, but is a bailout any less painful? For AIG yeah, but what about the taxpayer? I’m guessing that neither option is good, but why prop up people who have acted stupidly?
Yes these things can be painful…very painful. However propping up badly managed financial institutions that are saddled with bad debts isn’t doing anyone a favor and is merely postponing the day of reckoning or shifting the problems to another party, in this case the taxpayer.