Effect of the AIG Bailout on Stockholders and Shareholders

Introduction

The stakeholders are very important people to the company. The decisions made by the company have a direct impact on the value of their investment, either negatively or positively. AIG is one of the companies that were bailed out by the American government to prevent the company from collapse. This paper analyses the effects of AIG bailout on the stockholders and the shareholders.

Reduced windfall

The AIG bailout led to a reduced windfall of the AIG shareholders as they were receiving low rates compared to shareholders of other fragile companies. The shareholders delighted in a benefit of $22billion dollars after the bailout bargain that had been executed. The shareholders benefitted after the bailout; since, the company was now rescued from falling and they could now get profits of their invested money. Had the bailout not taken place, the company was at the risk of collapsing, resulting to loss of investment among the stockholders. After the bailout, the shareholders began to make reasonable profits that came as a result of boosting the activities of the firm from increased cash injection. The shareholders price was buoyed by the special treatment that was afforded to the tax treatment and that continued to offer AIG with billions of dollars even in times to come.

Despite the benefits, the AIG stockholders were penalized since they were deemed responsible for the failures that had made the company run bankrupt (United States Congress House of Represen 110). To ensure the enthusiasm of the U.S government and that of the citizen, shareholders in AIG brought to the table a 79.9 value stake to the government to where they could have reimbursed the cash in full.

Paying of the credit facility

The shareholders were required by the government to pay for money they did not borrow and yet they were not involved in the bailout process from the beginning. According to them, this was a bad strategy because; the credit facility required the company to pay back interest on undrawn capital bringing negative impact on the shareholders. The agreement was between the AIG board of directors and the Federal Reserve Bank while the stakeholders and the shareholders were the ones who could be accountable in repaying back the full amount of capital loaned to them. The stakeholders and all the shareholders had then to engage in a fire sale of profitable assets in order to raise enough profits and be able to pay back the loan.

Equity component

The stakeholders and shareholders of AIG saw the Equity component of the deal to be of no importance to them. This is because AIG had more than $1 trillion in assets and this could be used to secure the $85billion loan facility from the company. This was a very big pressure to the stakeholders as they have to give stake of their company to then government in exchange of the emergency loan rendered to them.

Shareholders pressure

The shareholders were put under high pressure for the sake of protecting the American taxpayers because their money is all that was used by then government to help bailout AIG. The taxpayers had actually lost money on the side of bailing out the AIG whereby, the treasury had failed to discount the company’s returns by an amount that could easily reflect the degree of risk involved. The stakeholders had to undergo this insurmountable pressure to ensure that they pay back the taxpayers money, thus encourage them to share in all potential upside of the company in its road towards a successful for rescue (Claessens, Kose, Laeven & Valencia 413). This type of pressure paved a good opportunity for the stakeholders and shareholders to address the liquidity problems in the company. The pressure on stakeholders would help ensure that the economy of the country is not affected and people are assured of secured jobs in the company.

Bankruptcy protection

After the bailout, every one of the shareholders chose to petition for a bankruptcy protection. This could help ensure that most of the Americans fared better in case a similar occurrence happened in the future. Bankruptcy protection could help ensure that AIG sound operating companies could not be affected due to impaired subsidiaries that could be there. Despite the fact that bankruptcy protection could have some negative risks, the advantage is that they could be systemic but not federal bailout risks. The bankruptcy idea could have helped in ensuring that some stakeholders don’t  prioritized over others as this had earlier contributed to the failure of the company almost making it run out operations. By deciding to embrace the bankruptcy idea by the shareholders, they prevented huge loses like the ones they had incurred in the past.

Correction of management

Most of AIG stockholders were wiped off after the bailout and action was taken to effectively preclude private sector solutions to all AIG’s manageable problems that could reoccur. The stockholders had encouraged underperforming management and had contributed to the fallout of the company (Barnett, Green & Halloran 158). They helped ensure that the few stockholders left were determined in working together in attaining the same goal. The stockholders who were wiped off had contributed to the loss of many jobs, thus making the Americas premier global insurer not to be intact.

Independent oversight

The shareholders decided to exercise independent oversight by encouraging for more response that could be better at exercising an element of economic stability. Ensuring economic stability meant that the shareholders had to vote against any under-performing directors in the company to ensure that there is no conflict that can be an obstacle as they perform. Economic status and credibility of the market was attained by stakeholders once they attained then bailout and addressed all issues of board effectiveness. They enforced for disclose of votes so that they could know who amongst them was voting for a dysfunctional board.

Conclusion

Decisions made by the AIG had both direct impacts on the value of the shareholders’ investment, either negatively or positively whereby, these bailout led to a reduced windfall of the AIG shareholders as they were receiving low rates compared to shareholders of other fragile companies. AIG stockholders were penalized since they were deemed responsible for the failures that had made the company run bankrupt. Most of AIG stockholders were wiped off after the bailout and action was taken to effectively preclude private sector solutions to all AIG’s manageable problems that could reoccur. The shareholders were put under high pressure for the sake of protecting the American taxpayer’s money.

 

Works Cited

Barnett, Phil., Green, Earley., & Halloran, Lawrence. The Causes and Effect of the AIG Bailout. Committee on Oversight and Government Reform House of Representatives. U.S Governemnt Printing Office.  2008

Claessens, Stijn., Kose, M. Ayhan., Laeven, Luc., & Valencia, Fabián.  Financial Crises: Causes, Consequences, and Policy Responses. International Monetary Fund. 2014

United States Congress House of Represen. (The Causes and Effect of the AIG Bailout). Bibliogov. 2010

 

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