There are several reasons for the government intervention in financial situations in certain businesses and industries. Some of the biggest government bailouts occurred during the 2007-2008 financial crisis. In times of economic recession, many companies experienced extreme financial difficulties (Lucas, 2019). Hence, one of the biggest bailouts in the history of the United States was the American International Group (AIG) bailout, which happened in September of 2008, and the total amount of the bailout provided was $182 billion.
The AIG was one of the largest insurance providers in the world at the time. Hence, the crisis that it had faced concerned the United States government that the collapse of such an insurance giant would lead to the collapse of other companies. After the AIG failed to find a private organization that would provide a loan, the government offered a massive $182 billion bailout (Lucas, 2019). The conditions of the loan were the resignation of the CEO, and the government took 79.9 percent of equity, hence, making AIG the first insurance company owned by the United States government.
In this case, the government had to consider a number of risks. First, due to the financial situation caused by the economic recession, it was hard to predict the market for insurance in the crisis environment. On the contrary, the government was facing an even bigger risk if the bailout decision was refused as AIG provided security of money market funds investments that were considered as safe options for individual investors. If the company collapsed, a vicious cycle of lost funds and investments would continue on a larger scale. Therefore, the government made a decision to bail out the company that was considered “too big to fail” (Lucas, 2019). This decision paid off as, in 2012, the Department of Treasury was able to sell the last of its AIG stock.
References
Lucas, D. (2019). Measuring the cost of bailouts. Annual Review of Financial Economics, 11, 85-108.