What Does the AIG Bailout Mean

August 5, 2009 · Posted in Credit Crunch, Economic Colapse, Financial Bail out · Comments Off 

On Sunday, September 14, the government drew a line in the sand on Lehman Brothers. After orchestrating a bailout of Bear Stearns by JP Morgan (with tens of billions in guarantees) the precedent was set – investment firms in trouble could simply go to the feds. The moral hazard, a term that is suddenly in vogue now when it should have been in vogue in 2005 and 2006, the bailout created was beginning to affect investor thinking. Without risk of failure reckless behavior is encouraged, and the actions of a few managers on Wall Street will be paid for by taxpayers.
So the line was drawn with Lehman. No bailout. It was the right move to restore the natural order of economics.

Two days later the government erased its line in the sand and gave an unbelievable $85 billion in emergency loans to AIG. What happened?
Fear is the answer. In response to the Lehman bankruptcy stock markets in the US and all over the world tanked. The sell-off was the most severe since 2001. But the stock market fear was not the fear the Fed was really worried about with AIG. Read more

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