U.S. Government Takes Over AIG in 85 Billion Bailout
To say this has been a wild ride for finance stocks, would be a huge understatement. Lehman Brothers, Merrill Lynch, and now AIG being rescued by the federal government for 85 billion dollars. The U.S. government through this bailout shows that AIG is too big to fail. What does this mean? Why can’t it fail? Well, apparently if AIG were to go out of business the financial impact would be felt from airline companies to life insurance recipients. AIG insures large and small businesses and the domino effect would be detrimental to the global economy. It should also be noted that AIG is a Dow 30 stock and held by thousands of individual and institutional investors. If you own a mutual fund, your portfolio manager might hold AIG stock. Well, the question of who’s next comes to mind. What made AIG unique from other insurance companies? Apparently they had similar exposure to investments tied to home foreclosures. What other U.S. companies are too big to fail? Do you agree? Should government be laissez faire or “hands off” with companies and allow them to fail?
Here’s a quick list of several U.S. global companies that may be too big to fail:
1. General Electric (GE)
2. American Express (AXP)
3. JPMorgan Chase (JPM)
4. General Motors (GM)
5. Ford (F)
6. Citigroup (C)
7. Washington Mutual (WM)
8. Wachovia (WB)
9. Bank of America (BAC)
10. ???? What would you add to this list?
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FFB Said:
I think it really depends on the company in question. With AIG, they have their hands in so many companies around the world that it seems it would be disastrous if they went under. I’m not sure the others you listed are the same way. If Ford went under it would be sad but another auto company would fill the gap.
And I’m not sure but doesn’t Berkshire Hathaway own a piece of Amex?
Posted on September 17th, 2008
Miranda Said:
At least with the AIG deal, it’s a loan, that AIG says it plans to pay back. It’s planning to sell assets to raise the funds necessary to pay back the loan. I’d rather see that than some of the other bailout silliness.
Posted on September 17th, 2008
Frugal Dad Said:
I agree with Miranda, at least a loan has the promise of repayment. Of course, if AIG still folds somewhere down the line we’re stuck with the loss of a large insurer AND $85 billion!
Posted on September 17th, 2008
Sustainable Communities Said:
Wow, what a bail out. Yes this is a loan, and am afraid we (Tax payers) will be paying off the debt, but should we expect anything different from the past? What F500 company will be next
Posted on September 17th, 2008
Ron@TheWisdomJournal Said:
I don’t believe in government bailouts despite the scare tactics of “they’re too big to fail” or “it would devastate our economy.” Any company that has to be bailed out is already insolvent and just a train wreck waiting to happen. Let the markets adjust. Equilibrium WILL happen but not if the government gets involved and, as usual, screws it all up.
It’s an illusion that we can wave a magic money wand and save the day. If the company couldn’t manage their money before a bailout, why does anyone in their right mind think they would be able to manage it afterward?
Posted on September 17th, 2008
Double Said:
I would rather the markets decide the faith of companies. It is just astonishing that government regulators get things out of hand, people bought houses with no equity, financial companies used high leverage to invest in risky mortgage assets, accounting auditors sleeping on the job again, short-sellers running rampant. It just seems like a comedy of errors that has now led to dysfunction in the financial market.
I am 100% in cash and see a huge sale going on in the stock market. Now is not the time to panic.
Posted on September 17th, 2008
Andy Said:
Bailouts and cash injections are set to continue, which means more taxes down the road. From your list, I think the following are NOT too big to fail
2. American Express (AXP) – Visa and Mastercard are much bigger with 70% of the market. So while AXP is iconic, it would not be saved. It processing business is very strong so if it does fail it should have no problems finding buyers.
5. Ford (F) – Has been close to failing for years. With US automakers only now 40% of the market, Ford is more a political risk than a financial risk.
7. Washington Mutual (WM) – Already failed and for sale.
8. Wachovia (WB) – Boderline. If it buys MS, it does become too big to fail.
Posted on September 18th, 2008
Scott Said:
@ FFB It’s interesting that we haven’t seen an automakers as part of the federal rescue bill. Ford, GM, and Chrysler all have auto loan divisions and must be feeling the impact of the housing mess. The Repo man must be busy trying to collect on foreclosed cars.
@ Frugal Dad and Miranda Yes, a loan still needs to be repaid and I guess if AIG goes under the federal government would be in line to freeze assets.
@ Sustainable Communities In just a week it looks like the federal government will keep many financial institutions afloat. We may never know which ones were close to bankruptcy.
@ Ron (The Wisdom Journal) This $700 billion bailout will be tough for many to swallow. Especially considering that financial models used to create these investments were flawed with poor assumptions on the housing market and loans. What happens to the small business owner miscalculates and bets on the wrong assumption. If you sell clothes and think it will be a cold winter and can’t sell jackets, you will lose money. Government will not come in and buy up your coats and excess inventory.
@ Double Looks like you will be able to put your cash to use as the broad market has sold off over the last week. This $700 billion bailout will be interesting to follow for all investors.
@ Andy Looks like your are correct and Wachovia will merge with another financial firm. More consolidation will probably shore up many of these banking stocks.
Posted on September 23rd, 2008