Global Financial Crisis | TIMELINE
One of the most remarkably and importantly economic event that had happened worldwide is 'Global financial crisis'. The whole story began in 2007.
9 August 2007 : BNP Paribas was ceasing activity in three hedge funds that specialized in US mortgage debt. Tens of trillions of dollars worth a lot less than the bankers had previously imagined. Nobody knew how big the losses were, trust was gone overnight, and banks stopped doing business with each other.
15 September 2008 : The US government allowed the investment bank Lehman Brothers to go bankrupt. Up to that point, it had been assumed that governments would always step in to bail out any bank that got into serious trouble: the US had done so by finding a buyer for Bear Stearns while the UK had nationalised Northern Rock.
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| source: qrius.com/global-financial-crisis/ |
The rescue of Bear Stearns and AIG
The Federal Reserve has been repaid for its roles in the U.S. government bailout of American International Group Inc. in 2008 and the rescue of Bear Stearns Cos. earlier that year.
The central bank’s $53.1 billion of loans to vehicles called Maiden Lane and Maiden Lane III, created to help save the companies, were paid back with interest, the Federal Reserve Bank of New York said today in an e-mailed statement. A separate entity, Maiden Lane II, finished being unwound through sales of mortgage assets earlier this year.
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| source: bloomeberg |
“This is a major milestone for the bank and for the public,” New York Fed President William C. Dudley said in the statement. “The Maiden Lane entities were established to protect the U.S. economy at a time of great economic stress, and I am pleased we were able to accomplish that policy objective and be fully repaid.”
Taxpayers remain at risk in the wake of the September 2008 bailout of AIG, once the world’s largest insurer, which swelled to $182.3 billion in value. The Treasury Department still owns 61 percent of the New York-based company and needs to sell the shares at an average price of $28.72 apiece to break even. The Fed may still generate profits as it disposes of remaining assets in the vehicles.
The district bank this year has been selling mortgage debt acquired in the AIG bailout after halting a series of 2011 auctions following a selloff in credit markets. AIG has said it’s been among buyers. The Fed has continued to sell assets from the Bears Stearns-tied Maiden Lane.
Why FED bailed out AIG?
Taxpayers remain at risk in the wake of the September 2008 bailout of AIG, once the world’s largest insurer, which swelled to $182.3 billion in value. The Treasury Department still owns 61 percent of the New York-based company and needs to sell the shares at an average price of $28.72 apiece to break even. The Fed may still generate profits as it disposes of remaining assets in the vehicles.
The district bank this year has been selling mortgage debt acquired in the AIG bailout after halting a series of 2011 auctions following a selloff in credit markets. AIG has said it’s been among buyers. The Fed has continued to sell assets from the Bears Stearns-tied Maiden Lane.
Why FED bailed out AIG?
AIG is a main player in derivative market called “credit Default Swaps (CDS)”.
In 2008, global finance crisis in Credit market and Real Estate market effect make many Reference Party can’t repay their debt to their lender, so their lender (financial institution) which buy CDS ticket from AIG claimed money that was flee by Reference Party from AIG.
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| source: glassdoor.com |
Since many financial institutions claim their money from AIG, it make debt burden to AIG around 13,300 million US dollar and that’s decreased AIG credit rate from AAA to AA. FED afraid that AIG will bankrupt, so Fed provide 85 billion US dollar, two-years loan to AIG but FED took ownership of 79.9 percent of AIG's equity in return.
FED bailed out AIG because FED don’t want to see AIG bankrupt and takeover by foreign company in cheap price and if AIG bankrupt it would trigger the bankruptcy of many financial institution which buy CDS ticket from AIG. Moreover, they want to protect the US government's original investment. In Tom yum kung crisis, US government disallowed Thai government to bailed out private financial institution. On the other hand, when it’s US government’s turn, they allowed it.
HOW ARE IT CARRIED OUT?
The terms of the bailout give sweeping powers to the Fed. The $85billion loan is collateralised by all of AIG's assets and the Fed can veto dividend payouts to the insurer's shareholders. So, it means that AIG was transferring control to the Fed.
Under the plan, the Fed will make a two-year loan to A.I.G. of up to $85 billion and, in return, will receive warrants that can be converted into common stock giving the government 79.9 percent ownership of the insure. All of the company’s assets are being pledged to secure the loan.
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| source: Edward Liddy | warriorforum.com |
Edward Liddy, AIG CEO, didn’t need monetary motivation to clean up the mess. The Fed hired him for a salary of $1. He successfully supervised a difficult strategy that safely reduced many of the outstanding credit default swaps. In December 2012, the Treasury Department sold off the last of its remaining shares of AIG. In total, the government and taxpayers made a $23 billion profit from the AIG bailout. That's because AIG was worth a lot more in 2012 than it was in 2008.
What is the moral hazard risk people talked about after the Fed’s rescues of several financial institutions?
Moral hazard occurs when a person is shielded from the consequences of his bad behavior or poor decision making and therefore acts differently than if he had to bear those consequences himself.
Government bailouts increase moral hazard by engendering a business climate in which companies feel they will be protected from the consequences of poor decisions and risky behavior. Because they no longer fear these consequences – at least not to the level they should – they often fail to take the proper precautions to guard against unnecessary risk. This lack of prudence frequently has far-reaching ramifications, including shareholder loss, insolvency, bankruptcy and dissolution. If decision makers are correct and the government steps in to bail the company out, consequences extend to everyone in society. Taxpayers shoulder the cost of bailouts, which also wreak havoc on government budgets.
R e f e r e n c e s
Elliot, Larry. (2011, 7, August). Global financial crisis: five key stages 2007-2011. theguardian.com/business/2011/aug/07/global-financial-crisis-key-stages
The Gray Area. (2015, 1, July). A Chronology of The Financial Crisis. thegrayarea.org/?cat=18481&step=2
Shenn, Jody and Tracer, Zachary. (2012, 15, June). Federal Reserve Says AIG, Bear Stearns Rescue Loans Paid. bloomberg.com/news/articles/2012-06-14/new-york-fed-says-aig-bear-stearns-rescue-loans-fully-repaid
Fed repaid on Bear and AIG rescue loans. ft.com/content/8204a844-b661-11e1-8ad0-00144feabdc0
Amadeo, Kimberly. (2017, 30, September). AIG Bailout: Cost, Timeline, Bonuses, Causes, Effects. thebalance.com/aig-bailout-cost-timeline-bonuses-causes-effects-3305693
Dr.Srisangnam, Piti. (2008, 18, September). จากปัญหา Sub-prime ถึง AIG และการตระบัติสัตย์ของสหรัฐอเมริกา (การเมืองใหม่กับนโยบายเศรษฐกิจภายใต้ภาวะวิกฤต ตอนที่ 2). oknation.nationtv.tv/blog/piti31/2008/09/18/entry-1
Clark, Andrew. (2008, 17, September). Federal Reserve rescues AIG. theguardian.com/business/2008/sep/17/aig.insurance.wallstreet
Dealbook. (2008, 17, September). A.I.G.’s $85 Billion Government Bailout. dealbook.nytimes.com/2008/09/17/aigs-85-billion-government-bailout/
DePersio, Greg. How do government bailouts increase moral hazard?. investopedia.com/ask/answers/042715/how-do-government-bailouts-increase-moral-hazard.asp
