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AIG taken over by US government |
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Written by Wilfred Ling
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Wednesday, 17 September 2008 |
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According to Bloomberg report HERE , AIG has been taken over by US government. Now, US government owns 79.9% stake in the company. This will help ease the existing problems and AIA customers should not be too worried now that AIG is owned by the world's most powerful government. On a short term basis, this will claim some nerves. However, my view is that this is a moral hazard. This is not the only company that the US government has to save. Freddie and Fannie were the other two companies that were too large to fall. If the US government continues to buy out companies - two things will happen: (1) On a long term basis, large companies who "knows" they are too large to fail will not exercise prudence in their business since they know they will never allowed to fall. This means more excesses. Remember - the current market problems is primarily due to high leverage. These excesses have never been prudent and yet everybody is doing so. So gonig forward, capital markets will be more unstable as there will be companies who think they never will be allowed to fall. (2) If US government continues to absorb "problems," it will come to a point which its credit rating will be cut. When that happens, the entire world will go into a dark age. By the US government "absorbing" the problem does not make the "problem" go away. If a company has bad debt, "absorbing" the bad debt does not make the bad debt good. How long can the US govt do this kind of thing?
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