AIG Needs to Go into Prepackaged Bankruptcy

by Odysseas Papadimitriou on March 22, 2009

AIG BankruptAs an insolvent company of this size, the government really has only two options for dealing with AIG.  They can either keep pumping money in, allowing AIG to fulfill all of its obligations (i.e. what the government is currently doing), or take AIG through a prepackaged bankruptcy to remove AIG’s Credit Default Swap (CDS) obligations. AIG has huge CDS obligations as a result of their greed in exploring the regulatory loophole that was created from CDS scandal.

By AIG not paying off its CDS obligations, there will be ripple effects throughout the banking/insurance industry.  However, we believe that dealing with these individual crises on a case-by-case basis, will be a much more efficient use of tax payer’s money. The President needs to work towards the best solution for taxpayers’ money. Clean house Mr. President! 

If you are still not convinced that AIG should be forced into a prepackaged bankruptcy, consider these three points:

  1. Despite the devastations reeked by AIG’s total mismanagement on the American economy, AIG executives are using bailout funds to pay themselves bonuses.
  2. A large sum of AIG’s bailout money is going to foreign banks to pay off its CDS obligations (around 33 billion according the Associated Press).  This means that U.S. taxpayers are now paying for the bailout of foreign banks.
  3. Free market principles need to be applied.  Both shareholders and debt holders allowed AIG to slip into its current state.  This means that shareholders must have their common stock go to zero value, and debt holders need to get pennies on the dollar.

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