The Federal Reserve Bank decided to loan $85 billion to AIG to prevent the large

Question

The Federal Reserve Bank decided to loan $85 billion to AIG to prevent the large insurance company from filing for bankruptcy. Lehman Brothers filed for bankruptcy during the same week and did not receive any government assistance. The Federal government also insured loans to General Motors and Chrysler. In July 2008, 5644 companies went bankrupt in the United States. That represented an 80% increase from the previous year.

Should the federal government bailout some companies experiencing financial stress and possible bankruptcy while letting other companies go under?

Explanation / Answer

Answer-My personal opinion is that in certain circumstances, yes there is a need for the government to bail a company out, while declining to bail others out. I think it depends on the effect the company’s failure would have on the nation. A large company such as General Motors employs tens of thousands of people. The company would have gone bankrupt and all those people would have lost their jobs, having a domino effect on the economy. The entire auto industry would have suffered, including automotive, sales, service, and parts. A small company or a company whose closure would have little impact on the nation’s economy should not receive a government bailout. Bail out should be determined by the total economic effect a closure would have on the nation’s economy.

Other factors are a company’s ability to repay the bailout, it’s collateral, and it’s risk assessment. When comparing AIG to Lehman Brothers, AIG was considered a good risk and had collateral, while Lehman Brother’s was not.

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