My mom made an interesting comment the other day, about how it was too bad Lehman Brothers didn't fall apart later, so that they could benefit from recieving a bailout from the government, like AIG. What was interesting about her comment, is that, yes AIG did recieve a government bailout, however, the repayment terms of the bailout are so steep, that inevitabley the insurance giant will go bankrupt paying it all back. I know this because my dad, who worked for AIG for 20 years up until this time last year, now works for AIG's former CEO Hank Greenberg, who sent out a letter to the employees of his company CV Starr, explaining the details of AIG's bailout, and how it was bring down the company in the long run. He wishes to save AIG, and proposes new terms for repaying the bailout.
So the real question is, is it worth actually bailing out a company, if it only just prolongs the day they have to close, instead of helping to keep them open indefinately? Or is this the price a firm should pay for reckless behavior
3 comments:
In my opinion, no matter when Lehman Brothers failed, the Fed would probably still not help it out. The reason, which was articulately discussed in (if i remember correctly) the Freakonomics, is because the Fed just bailed out Bear Stearns not so long ago because of an "extraordinary circumstances" (early this year), and it doesnt want to slap its own face and admit that it made a wrong move and bail out a very similar firm, Lehman. For the outcome of AIG bailout, it's very interesting to see what will happen. If AIG makes it, that's great. If not, as we discussed in Dr. Simon's Mon-Fis class a few weeks earlier, we would see a tough time of possible depression. Of course, the government wants all these giant firms to somehow open indefinitely (because its failure/ bankruptcy would affect the entire economy). However, I dont think the government can realistically save them 100%, because it means the government will become a sole owner of the firm, which somehow means a socialist/communist scheme that the U.S. would never want anything to do w/. Just my humble thoughts... >_<
The opportunity cost our economy saved from the bailout could have been rather significant. Even though AIG may still inevitably fail in the future, this would have been a terrible time(in terms of the state of our economy) for a company like AIG to go under. And if they go under down the road, we may be better armed to take the failing. For the gov't, bailing them out now saved us from seeing further deterioration of the economy.
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