1. If AIG had been allowed to fail, what types of financial institutions would have been adversely affected?

2. Who benefited from the bailout of AIG?

3. Do you think AIG should have been allowed to fail?

Its not a case study, this is the event.

On September 16, 2008, the Federal Reserve provided an $85 billion, two-year loan to AIG to prevent its bankruptcy and further stress on the global economy.

In return, the Fed owned 79.9% of AIG's equity, the right to replace management, and veto power over all important decisions, including asset sales and payment of dividends. It replaced management and has veto power over all important decisions, including asset sales and payment of dividends.

The bailout occurred exactly one day after U.S. Treasury Secretary Henry Paulson said no to further Wall Street bailouts, allowing Lehman Brothers to go bankrupt. It came one week after the government took over Fannie Mae and Freddie Mac and six months after the Fed bailed out Bear Stearns. Later than week, Paulson and Bernanke headed to the Capitol to ask for a $700 billion bank bailout to rescue all other banks.

In October 2008, the Fed hired Edward Liddy as CEO and Chairman to break up AIG and sell off the pieces to repay the loan. However, the stock market plunge in October made that impossible, as potential buyers needed any excess cash for their own balance sheets. Meanwhile, Liddy had to safely unwind billions in credit default swaps. (Source: AP, Government Provides Record Aid Package to AIG, November 11, 2008)

On November 8, 2008, the Federal Reserve's $85 billion bail-out of insurance giant AIG was revised. The Treasury Department purchased $40 billion in AIG preferred shares from its Capital Repurchase Plan. The Fed purchased $52.5 billion in mortgage-backed securities. The funds allowed AIG to retire its credit default swaps rationally, stave off bankruptcy and protect the government's original investment.