Friday, September 19, 2008

Why the AIG bailout is bad news for all...

OK, some seriousness today...

The collapse of one of the worlds leading insurers AIG and its subsequent rescue by the US Federal Reserve in exchange for 80% of the companies ownership is very alarming.

I am not sure if Australians are aware of AIG other than the fact that they are the sponsors of Manchester United, but the reality is that many Australian corporates rely on AIG for insurance and the collapse of such a large entity will spell operational cost increases for those corporates and hence those costs will be passed on to their customers - i.e us punters.

To put it into terms we Australians understand - HIH Insurance collapsed leaving debts of $4.5Bn. AIG needed A$107Bn to bail it out... roughly 25 times the size... and yet we Australians still spit when we hear the acronym HIH.

But the government bailed out AIG in the US and now own 80% of the company. Whilst that is a good thing in the short term, how can such a large company now be owned by the government and continue to operate... I believe that what the US Federal Reserve has done is stopped AIG imploding but it will still die a slow death and ease the sudden pain on the economy.

But what next? If AIG has collapsed, then what about the other big players in finance? How many companies need help? How many will get it? And what happens if the US Federal Reserve continues to buy up ailing big companies?

We suddenly move from a free economy to a government owned economy.

Is that not Communism?

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