The Federal Reserve Bank loaned $85 billion to AIG to prevent the large insuranc

Question

The Federal Reserve Bank loaned $85 billion to AIG to prevent the large insurance company from filing for bankruptcy during the 2007-2009 recession. Lehman Brothers filed for bankruptcy during the same week and did not receive any government assistance. The Federal government insured a loan to Chrysler several decades ago to prevent the automaker's failure.
In July, 2008, 5644 companies went bankrupt in the United States. That represented an 80% increase since July, 2007.
Should the federal government bail out some companies experiencing financial stress and possible bankruptcy while letting other companies go under?

Explanation / Answer

The Federal government analyses the troubled companies and its impact upon the economy in terms of employment generated by the company, investors’ confidence, scope of recovery of the company towards the path of turnaround and possibility of restructuring of the assets of the company among the other factors. On this basis of analysis, few companies qualify and others fail. The company qualified under the strict evaluation, criteria are bailed out by the federal government.
So, the Federal government should only bail out those companies who can recover and make a turnaround and their issues are genuine with a need of assistance from the Federal government. Any company suffering from the problem of moral hazard, agency conflict and poor assets that are unable to be revived, should go for the bankruptcy.
If the federal government bails out all the companies, then it will become a trend. Company management will take speculative decisions, and federal government will bail out when they will be in trouble.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.