Government Saves AIG in Historic $85 Billion Bail Out

Americans may be a bunch of whiners, as Phil Gramm, Senator John McCain's former economic adviser, was quick to point out. And Americans may be suffering from a "mental recession," but the number of bank closures and financial organizations filing for bankruptcy and/or going out of business keeps growing. Lehman Brothers went down Monday and the Federal Reserve bought 80% of the financial insurance giant American International Group (AIG) Wednesday, September 17. Announced the previous evening, the news was as shocking as it was unprecedented.

Why Did The Federal Reserve Bail Out AIG?

The federal government bailed out Bear Stearns. However, they refused to buy out Lehman Brothers. Analysts say that the Bear Stearns bail out was intended to be a one-time deal. Economists point to the fact that investors have known for months that Lehman Brothers was tanking and many provisions were made for just such an occurrence, which is why the government decided to let that financial giant fall. But AIG was another story.

AIG operates in 130 countries and not only is a major money lender but also a major lending insurer for billions of dollars worldwide. If AIG had been allowed to fall, it would have sent a ripple-effect throughout the world's economy. With other major financial institutions suffering through the mortgage crisis and an economy in the doldrums, an AIG failure would have toppled pension funds, corporations, and devastated businesses and stocks in every market around the globe.

The U. S. Federal Reserve could not let that happen. They announced a buy out of 80% of AIG for $85 billion, basically nationalizing the giant corporation.

What Does This Mean To Investors?