Did we need to bailout AIG?

American Insurance Group (AIG) is a large and complex financial institution with 70 million policyholder, including 30 million in the United States itself, offering insurance protection in various forms to 100 000 businesses, town, retirement plan and other entities of various sizes and operated in 130 countries. As indicated by Mr. Joseph Cassano, head of Transaction Development Group of AIG, at the 2007 conference, his company worked with a global swath of top notch entities that included banks and investment banks, pension funds, endowments, foundations, insurance companies, hedge funds, money managers, high-networth individuals, municipalities and sovereigns and supranational. Due to its interconnection and complex interlocking with major global financial institutions, inaction is not an option for the government of United States. Speaking before the House of Financial Services Committee, Ben Bernanke, Federal Reserve Chairman defended governments action to bailout AIG. He argued that taxpayer would have seen their retirement accounts diminish by 70 percent had AIG not been save, rather than 50 percent loss many accounts have experienced. The prospect of letting AIG to default on its Credit Default Swap (CDS) contracts would cause a ripple effect for the health of global financial market. Through its London Office, known as AIG Financial Products (AIGFP), AIG reached global financial market and became its major player, interconnected and interlocked in the complex, integrated global financial market. Thus, the risk of ripple effect caused by the failure of AIG could hardly be overestimated. The Economist in its article on April 14th 2009 described it as a backdoor bail out for other major financial institutions, including twelve foreign banks. The biggest recipient, Goldman Sach maintained it had no exposure to AIG and claims to have fully hedge any counterparty risk as indicated by the letter from Goldmans Lucas van Praag, in a letter to the Wall Street Journal. However, it does not render the bail out as unnecessary. Dealing with the wide range of products offered by AIG such as life insurance, annuities would be messy and complicated. Besides, the failure of AIG would cause a global and widespread panic in the global financial market due to unfavorable development in the financial market. Recession was at its worst level and the collapse of the oldest investment bank in United States, Lehman Brothers renders the failure of AIG not as an option, rather a necessary action to contain the damage

even though as indicated by The Economist as an unpleasant, expensive and politically costly.