According to this theory, no government across the globe will allow any big financial institution or a bank to collapse so easily. This is because the after effect or the consequences of such collapses would definitely be great and at time will be out of control to handle despite how big the economy in which the collapse occurred. This exactly is the basic reason as to why AIG was bailed out by the U.S. Federal Reserve. The reasons substantiated by the U.S. Federal Reserve as to why it took this step of bailing out AIG was it felt that the collapse of such a big financial institution would definitely add to the woes of the financial markets and economy which is currently delicate. The Fed also stated that the collapse of AIG would also result in higher cost of borrowings, reduction in the household wealth and also weaken the current performance of the economy. It was also true that the collapse of AIG would not only effect the U.S. economy alone as felt by the Fed but would also have a drastic and negative impact on the global financial markets.
Now, the important and popular question that is prevailing in the global markets is to why has Fed bailed out only AIG and not the other financial institution that collapsed during the same time i.e. ...
If the scenario or the case of Lehman Brothers' is observed, the company was having problems with its financial situation for almost more than a year now i.e. since the year 2007, one year even before the company bankrupted. In the month of August 2007, the company closed one its subprime lenders. As a result of this the company recorded a onetime post-tax charge of approximately $25 millions. This scenario did not end there.
The same kind of situation continued even in the year 2008 when the company wrote down a huge number of its subprime mortgage securities. These write downs of the company's subprime mortgage securities as accounted by the company were a $2.8 billion loss in the second quarter. If the company's financial position or the various situations of the company were looked for the period of January to June of the year 2008, the value of stock loss of the company can be equated to almost 75% (IPC'sIntelligent Investor, 2007). These happenings in the company and its stock position or value itself acted as a sign of caution to its investors. To be specific, as the scenario of financial troubles at Lehman Brothers' was happening for almost one year and as investors knew what was happening in the company and also the decrease in the stock value, it would have been a clever idea to pull out the fund from such a company or at least look at alternatives to save their investments which most of the investors of Lehman Brothers' did not do. This alone can be mentioned as a reason behind the U.S. Federal Reserve's move of bailing out AIG and letting off Lehman Brothers'.
Similarly, if the scenario at AIG is observed, the financial trouble or crisis occurred all of a sudden in the company. The collapse of Lehman Brothers also would have