Wednesday, September 17, 2008

AIG and Turmoil in the Financial market

Following the collapse of Lehman Brothers yesterday, I was wondering whether the US Govt. would allow the same thing to happen to AIG, the country's biggest insurance company. Well today morning I learnt they didn't. I guess they couldn't.

When I learnt that US Federal Reserve was bailing out AIG with a $85bn (£48bn) rescue package this was something big. According to this 2 year deal, the US government will receive a 79.9% equity interest in AIG. A case of nationalisation of a financial body in Capitalist America.

I recall that during the Asian crisis, the US Government was against Government intervention and to let "market forces" rule. They were particularly angry when the then Prime Minister of Malaysia, Dr. Mahathir Mohamad defied the International Monetary Fund and put in controversial capital controls. I have often heard Western economists talking against Government intervention in the markets, of denationalisation of businesses as the only route to economic development. I agree to some extent but as this case shows, sometimes Governments have to intervene against market forces to protect the interest of the people. As the Board of the Federal Reserve mentions about the need to protect "the interests of the US government and taxpayers". It's quite interesting that they don't see it that way if similar events happen in other countries.

Looks like it is going to be a time of turmoil for the financial market as several companies go under or are bought over. JPMorganChase acquired Bear Stearns recently and Bank of America has announced that it would buy Merrill Lynch & Co.


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Bruce said...

Good post. Thank you Adam!

BabyPink said...

hi adam!:)

Ramadhan kareem to you and your family! i've been following your blog through my mobile, but i couldn't post comments because, for some reason, it just won't work with my mobile. i'm at a net center now.:)

Te Verde said...

Good post. Thank you Adam!


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