The 5th Amendment to the U. Constitution prevents private property from being taken for public use without just compensation. Starr's lawyers have argued that the Federal Reserve Act does not allow the government to demand a stake in the company in exchange for the loan.
Supreme Court during the contested presidential election. Skip Navigation. VIDEO Geithner was president of the New York Federal Reserve at the time of the rescue and later Treasury secretary. That statement was in line with testimony Monday by former Treasury secretary Henry Paulson, who said the AIG bailout was specifically designed by the government to punish the company. Geithner is expected to return Wednesday for a second day of testimony in the trial at the US court of federal claims in Washington.
It would insure CDOs against default through a financial product known as a credit default swap. The chances of having to pay out on this insurance seemed highly unlikely. The CDO insurance plan was a big success, for a while. A big chunk of the insured CDOs came in the form of bundled mortgages, with the lowest-rated tranches comprised of subprime loans.
AIG believed that defaults on these loans would be insignificant. And then foreclosures on home loans rose to high levels. AIG had to pay out on what it had promised to cover.
Accounting issues within the division worsened the losses. This, in turn, lowered AIG's credit rating, forcing the firm to post collateral for its bondholders. That made the company's financial situation even worse. It was clear that AIG was in danger of insolvency. To prevent that, the federal government stepped in. But why was AIG saved by the government while other companies affected by the credit crunch weren't? Simply put, AIG was considered too big to fail.
A huge number of mutual funds, pension funds, and hedge funds invested in AIG or were insured by it, or both. For example, media reports indicated that Goldman Sachs Group, Inc.
Money market funds, generally seen as safe investments for the individual investor, were also at risk since many had invested in AIG bonds. If AIG went down, it would send shockwaves through the already shaky money markets as millions lost money in investments that were supposed to be safe.
However, customers of AIG's traditional business weren't at much risk. While the financial products section of the company was close to collapse, the much smaller retail insurance arm was still very much in business.
In any case, each state has a regulatory agency that oversees insurance operations, and state governments have a guarantee clause that reimburses policyholders in cases of insolvency. While policyholders were not in harm's way, others were.
And those investors, who ranged from individuals who had tucked their money away in a safe money market fund to giant hedge funds and pension funds with billions at stake, desperately needed someone to intervene. While AIG hung on by a thread, negotiations took place among company executives and federal officials. Once it was determined that the company was too vital to the global economy to be allowed to collapse, a deal was struck to save the company.
Later, the terms of the deal were reworked and the debt grew. AIG's bailout did not come without controversy.
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