...Coolich AA #2 11/4/14 AIG Ex-CEO Willumstad Testifies Bailout Was Only Deal In 2008 American International Group Inc., like many other financial institutions lost money during the financial crisis due to investments of sub-prime loans. In the interest of saving the company and saving the shareholders even a small portion of their invested money, AIG board of directors took a bailout package offered by the US government. The government bailout required that AIG give them control of 80 percent of their stock in return for a $85 billion loan that carried an interest rate of nearly 14 percent. “The board voted for the loan deal after exhausting private-sector lifeline possibilities.” (Zajac, 2014) At the time of the bailout the only other option for AIG was bankruptcy. “But AIG’s former chief executive officer, Hank Greenburg still owned a lot of AIG stock, and he sued, arguing basically that the government should have given AIG a nicer bailout, the way it did with JPMorgan and Citi. Other bailouts were also conducted during this crisis and with much better interest rates than American International Group Inc., received. To accomplish taking almost 80 percent of the company’s stock the board agreed to a reverse stock split making shareholders stock almost worthless. “Greenburg is suing the federal government for about $40 billion in damages, asserting that it violated the Constitution’s Fifth Amendment by taking control of AIG with “just compensation” for the shares...
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...Can We Expect A Regulated CDS Market? Derivatives Project Xilin Yang (Celine) Introduction The article introduces credit default swaps and explores the problems of the credit derivatives. By analyzing the AIG’s bailout, the article describes the regulation gap in the CDS market and states the regulation reform after the crisis. Part I is background, generally introduces the Wall Street crisis. How it happened? What consequence it has? Part II is mainly about AIG’s CDS business: how AIG got involved in the crisis and why the biggest world insurance company suddenly collapsed. Part III is about credit default swaps: definition, construction, and problems. Part IV is concerned on the regulation reform after AIG’s failure. Wall Street Crisis Speaking of the Wall Street crisis, people all know it proceed from subprime crisis. The relatively low interest rate prompts banks to issue large amount of housing loans. To transfer default risk embedded in those loans, investment banks package those loans and mortgages into student loans, car loans and credit card debt, which form the so-called collateralized debt obligation (CDOs). All these derivatives depend on the housing loans. In the era of low interest rates, house prices rise rapidly and promote the rapid development of the housing loans business. With steady stream of housing loans into financial derivatives products, different ranks of products are packaged to sale out. The good view of economy makes those potentially risky...
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...share responsibility for the AIG bailout situation. The first fault lies with the ratings agencies. These agencies (S&P, Moody’s) gave AAA ratings – the highest level of creditworthiness – to the underlying securities that backed the CDS’ that AIG sold. This misrepresentation of the nature of these securities occurred either because of negligence on the part of the ratings agencies or by fraud. In either case, AIG perhaps did not realize that the securities on which they were basing their CDS’ contained a high percentage of subprime loans. AIG also must take responsibility for its actions. If the company did not realize that the AAA ratings were a sham, it should have. The company is in the finance business and was essentially placing a $400 billion bet on these products. It is irresponsible for a company to sell that much of a product – especially considering the importance of CDS’ to the top and bottom lines – without knowing what they are selling. If they did realize that these securities were not as secure as the agencies indicated and misrepresented them to customers, then AIG should shoulder most of the blame. The final component of blame should fall to the Federal Reserve. In this situation, the Fed (and White House) should have ensured that if they were going to bail out AIG and take over 80% of the company, controls should have been put into place to ensure that the taxpayers receive their money back. Profligate spending at AIG should not have been allowed...
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...Government Bailouts Economist believe that allowing financial institutions and international corporations to go bankrupt could have a far reaching effect on the government and in particular on the citizens who depend on these organizations Companies such as AIG, Chrysler, Ford, General Motors, Fannie Mae and Freddie Mac should receive bailouts because they provide essential products and services for their consumers as well as provide numerous job opportunities to the citizens of the state. According to the supporters of the bailout plan, the economy needs rescue and helping out banks and other institutions in financial crisis will go far in reviving the economy as well. Take for example the case of AIG which received $85 billion bailout loan from the government in 2008. Why would the government not let the company close up? AIG can be described as 'too big to fail'. This logic is that if financial firms or corporations go under it can drag others with them (Fernholz, 2009). AIG the insurance giant provides insurance cover for major companies and individuals in the U.S and other countries. If the company went bankrupt then a lot of losses could be felt in the economy as millions of covers and policies go unpaid. While we may not be able to fully blame bankers and other corporate heads for the economic meltdown that followed a market-wide failure in 2008, but it does seem that bankers want to take advantage of profits when the economy is good and then pass the...
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... Today, more than two years later, its devastating effects are still being felt as the government continues to struggle with the bailout to stabilize the financial system, mitigate contagion risk, and resolve the CLICO crisis. Even one year after the bailout, there was still no resolution of the crisis. In view of the intractable nature of the CLICO collapse, the People’s Partnership government that came to power on May 24, 2010 established a commission of enquiry to investigate the causes of CLICO’s collapse, the scope of the MOU, the cost of the bailout, and the failure to provide a bailout to the Hindu Credit Union (HCU) that collapsed in 2008. There are many questions that are still unanswered. What were the root causes of CLICO’s collapse? What corporate governance structures and practices precipitated the collapse? Did the bailout create moral hazard? Who or what was to blame for the collapse? What action has the government taken to date? What lessons have been learnt and, more importantly, how can this situation be prevented from being repeated in the future? This concept paper examines these questions, analyzes the evidence to find answers, and in the conclusion, suggests ways to improve corporate governance and the empowerment of regulators to provide competent regulatory oversight and enforcement. Key words: financial collapse, bailout, corporate governance, moral hazard, political influence, risk management Introduction The devastating effects of the corporate...
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...Are Science and Religion in Conflict? Name PHI 103 Instructor Date The economic crisis that struck the world between 2008 to 2009 had such resounding adverse impacts that brought even the mightiest economies to its knees. Even at present, the far-reaching effects of the crisis remain almost palpable and may be seen in high unemployment rates, economies still in recession and seemingly insurmountable national deficits. The United States, where the crisis had its beginnings continues to suffer from the recession even if it is gradually recovering. The present problems in the Euro zone may be partly attributed to the recession of 2008. Because of these, many scholars, economic analysts, researchers and businessmen continue to endeavor up to now to discern what the real cause of the economic crisis was in the hopes that it will not happen again. Many people attribute the global economic meltdown to the collapse of the subprime sector in the United States. To put it simply, the mortgage sector was blamed for the crisis because of how many financial instruments were collateralized by mortgages of people who had bad credit histories. When too many of them failed to meet their obligations, it began a series of defaults that ultimately collapsed not only the mortgage industry but the financial industry as well. All those that have investments in both sectors, local and foreign entities, also became affected as they lost what they have invested...
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...12 International Strategy 13 Institutional Strategy 13 Recommendations for Future Growth 14 Delivering Value to Customers 14 Human Resource Capital 15 Research and Development 16 References 17 Bibliography 18 Introduction The ‘Credit Crunch’ emerged in 2007 with the first effects being felt by the U.S. Mortgage industry. The term ‘credit crunch’ came was used to describe the collapse of the subprime mortgage industry that resulted in a freeze in lending by financial institutions. With non-payment of loans, huge debt and no capital gains, financial institutions began to go under. Investment banks, financial services and real estate market felt immediate impacts. Trillions of U.S. dollars were lost, huge government bailouts were necessary and a global slowdown of consumer spending and economic activity. In fact, by early 2008, the effects snowballed to global markets. Prior to 2007 and this global economic crisis, the lending habits of the Mortgage industry had opened the way for this eventual collapse. Mortgages were granted to low income earners at low interest rates. These were called subprime loans...
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...This article was downloaded by: [Loughborough University] On: 26 March 2015, At: 11:27 Publisher: Routledge Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK Public Money & Management Publication details, including instructions for authors and subscription information: http://www.tandfonline.com/loi/rpmm20 How the UK government responded to the fiscal crisis: an outsider's view Walter Kickert Published online: 23 Mar 2012. To cite this article: Walter Kickert (2012) How the UK government responded to the fiscal crisis: an outsider's view, Public Money & Management, 32:3, 169-176, DOI: 10.1080/09540962.2012.676273 To link to this article: http://dx.doi.org/10.1080/09540962.2012.676273 PLEASE SCROLL DOWN FOR ARTICLE Taylor & Francis makes every effort to ensure the accuracy of all the information (the “Content”) contained in the publications on our platform. However, Taylor & Francis, our agents, and our licensors make no representations or warranties whatsoever as to the accuracy, completeness, or suitability for any purpose of the Content. Any opinions and views expressed in this publication are the opinions and views of the authors, and are not the views of or endorsed by Taylor & Francis. The accuracy of the Content should not be relied upon and should be independently verified with primary sources of information. Taylor and Francis shall not be liable...
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...Group (AIG) and American International Group Financial Products (AIGFP) were directly in the center of the collapse. Within AIG and AIGFP, a few managers stood out when it came to involvement in the financial scandal. Maurice “Hank” Greenberg is one manager that undeniably stands out. He was the founder and Chief Executive Officer of AIG until 2005. He micromanaged his workers and gave them little freedom (Bandler, Boyd, and Burke). Obviously, his managing tactics influenced the demographics of AIG tremendously. Joe Cassano, another core manager, was the CEO of AIGFP. He implemented credit-default swaps (CDSs) and oversold them, resulting in AIG having to file for bankruptcy because it couldn’t pay the buyers of these CDSs back (Serwer and Sloan). While these two men were heavily involved in the cause of the collapse, they raised many questions regarding the fact that AIG’s questionable decisions passed regulations and audits. Many people have looked into how AIG and AIGFP didn’t cause fuss while they were getting audited. How did they pass all of these regulations without any problems? It has been noted that Greenberg had previous relations with a lot of so-called “big-shots” in the business world that could have had an impact on the results of these audits and regulation checks (Cass Business School). This may or may not have influenced the result of AIG during 2007 and could have potentially prevented the financial crisis if regulators did end up lying about AIG. Many...
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... Today, more than two years later, its devastating effects are still being felt as the government continues to struggle with the bailout to stabilize the financial system, mitigate contagion risk, and resolve the CLICO crisis. Even one year after the bailout, there was still no resolution of the crisis. In view of the intractable nature of the CLICO collapse, the People’s Partnership government that came to power on May 24, 2010 established a commission of enquiry to investigate the causes of CLICO’s collapse, the scope of the MOU, the cost of the bailout, and the failure to provide a bailout to the Hindu Credit Union (HCU) that collapsed in 2008. There are many questions that are still unanswered. What were the root causes of CLICO’s collapse? What corporate governance structures and practices precipitated the collapse? Did the bailout create moral hazard? Who or what was to blame for the collapse? What action has the government taken to date? What lessons have been learnt and, more importantly, how can this situation be prevented from being repeated in the future? This concept paper examines these questions, analyzes the evidence to find answers, and in the conclusion, suggests ways to improve corporate governance and the empowerment of regulators to provide competent regulatory oversight and enforcement. Key words: financial collapse, bailout, corporate governance, moral hazard, political influence, risk management Introduction The devastating effects of the corporate...
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...Review of Too Big To Fail - In this movie following Treasury Secretary through the 2008 financial crisis as it morphed into a national and international crisis, the mix of staged and true-to-life news recaps was quite compelling. Although I personally know the turn of events (I have several investments that saw the effects of the 2008 financial crisis) I found it unique to start the movie with true news clips which brought great validity to the story line. I personally was constantly questioning “did that really occur or was that Hollywood’s input?”. The start of the movie where a government official – the Treasury Secretary – was asked to call a private investor (Warren Buffet) to assist Lehman Brothers shocked me. Did/Can he really do that? I find that event to be bordering on unethical behavior and wonder what Buffet thought of our government when they asked him that. Later in the movie, Buffet is called again – what power Buffet has!? I also questioned the fact that our Treasury Secretary had former employment ties to Lehman Brothers and could be a bit jaded. His professional experience obviously was something the government wanted to capture. The hasty firing of the higher executives at Lehman Brothers was a bit hasty in my opinion. The movie depicted that their personnel replacements were not well thought out as well (poor handling of the meeting with the Korean representatives). Following that, I found it very odd that our government asked other companies to “help”...
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...Revolt on Goose Island: The Chicago Factory Takeover, `and What it Says About The Economic Crisis INTRODUCTION Kari Lydersen, a staff writer for the Washington Post, wrote the Revolt on Goose Island: The Chicago Factory Takeover, and What it Says About The Economic Crisis in 2009. This was during a time when the economy was in financial crisis and many lives were being disrupted. It is situated in Chicago, Illinois at the Republic Windows & Doors factory. This story tells how 250 members of the UE, a very progressive union took a stand for what they believed they were owed. The purpose of writing this book was to show that people in the labor force were tired of being taken advantage of and wanted their lives to matter. THE COMPANY The Republic Windows & Doors factory was located on what is known as Goose Island in the Chicago River. This was an area that used to be located in the heart of the industrial and commercial businesses. The area had lost most of its industrial businesses and was in a revitalizing mode to turn it back to the industrial roots that had first started that area. Republic Windows & Doors was a small family owned business that made low-cost storm windows and doors (Lydersen, 22). By moving to Goose Island, the city committed almost $10 million in 1996 to help Republic establish the new building and to grow (Lydersen, 25). The money was funded through TIF (tax increment financing) funds that are used to revitalize areas that have declined...
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...In recent years especially with the financial crisis, a number of countries have found themselves needing a bail out of some sort. From the PIGS of Europe to South Asia and Africa. What all these countries have/had in common was the need for funds to facilitate a bailout of their faltering economies especially the banking sector. Like the countries that need a bail LDC always need money to finance their debt and pay off any interest especially in time of uncertainty. The purpose of this paper is to present a way for such countries to meet their financial needs and to protect their banking sectors. Unlike businesses or corporations, countries have access to natural resources which can be got and sold on the world market for a profit. Some countries even have an immediate market for their minerals like oil and gold. Almost all LDCs and a number of the other countries that needed bail out funds, have these resources that can be sold for profit. However in a situation where quick funds are needed, selling these resources would take a considerably long period of time which is not available at that instance. This can be remedied by the sell of long term covered call options on the resources of the different countries that need the funds. An options strategy is when an investor holds a long position (owns the asset: in our case mineral) in an asset and writes (sells) call options on that same asset in an attempt to generate increased income from the asset. This strategy is often...
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...Capitalism: A Love Story, which opened in 962 theaters earlier this month, is Michael Moore’s most ambitious work yet – taking aim at the root cause behind the injustices he’s exposed in his other films over the last 20 years. This time capitalism itself is the culprit to be maligned in Moore’s trademark docu-tragi-comic style. And by using the platform of a major motion picture to make a direct assault at the root of the problem, Moore has created space in the political mainstream for a radical conversation (radical meaning “going to the root”). It’s a conversation that is desperately needed as the economic crisis continues to devastate low- and middle-income Americans in spite of President Obama’s and Congress’ efforts to stop the bleeding by throwing trillions of dollars at the banks. Yesterday, Democracy Now! reported that while the Dow Jones topped 10,000 for the first time in a year, foreclosures have reached a record level of 940,000 in the third quarter. But with this film airing in major chain cinemas across the nation, the normally taboo topics of how wealth is divided, who owns Congress, and how vital economic decisions are made are now open for discussion in a way they haven’t been in the U.S. for decades. In Capitalism, Michael Moore features the reality of the economic crisis for America’s usually-invisible poor and working class. The movie begins with a family filming their eviction from their own home. In a terrifying scene, we watch from inside their living...
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...2008 Bank Bailout Economic crisis that strike a nation don’t happen from night to dawn, several factors attribute for an economic crisis to happen similar to a meltdown. This was the case for the 2008 economic crisis in America since the great depression that collapsed the stock market in 1929. Several are needed for a market to crash and crumble in pieces, risky investments, reckless decision making, and investments taking on a greater risks in hopes of greater returns are believed to be what caused the 2008 economic crisis in America. I believe that the bailout plan helped in the short term but will have its negative effects in the long run. The private sector in America especially the banks have a huge impact on the economy; there’s a lot of competition in that aspect of the economy. I believe that when the government intervenes in a free market economy and in the private sector it has to be with rules, regulations and under certain circumstances. The banks cannot just take risks loan money without checking first if the person can pay. For every act there is a consequence that has to be faced. The banks can’t just expect for the government to save them every time the feel they will go bankrupt. The government has stepped in several times since the beginning of 2008 to assist failing financial institutions. In September 2008, the federal government extended $85 billion to the American International Group, the country’s largest insurer and one of the world’s largest companies...
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