More Fuel for the Fire – AIG

us-economy-771581What do you do with the company that posts biggest quarterly loss in U.S. corporate history – a $61.7 billion loss?

If you’re the US Government, you hand that company – AIG – another $30 billion, and send the stock market into freefall.

With investors uncertain about what will happen next, we can be certain that AIG will be back at the trough before long.

In fact, AIG’s CEO, Edward Liddy, said today that he wouldn’t rule out needing another bailout.

Why? Why does the government keep handing our money to AIG – now more than $150 billion?

Banks all around the world never fully-accounted for the losses they would have to take if their loans stopped paying off at expected rates because they had bought insurance against these losses from AIG. If the banks had to account for those likely losses, they would have to start socking money away.  This is what regulators are trying to prevent by bailing out AIG.

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And that, friends, is the danger of fractional reserve banking.

Apparently, AIG sits at the base of this house of cards, insuring the loans banks made with money that didn’t actually exist.  If AIG falls, many banks will fall along with it. Lately, I’m thinking that wouldn’t necessarily be such a bad thing.

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