Financial Crisis

In the past week our government could have just saved our entire economy from ending up in a depression. On September 15th, 2008 the Dow Jones Industrial Average, this is a index fund of the 30 largest companies, fell 5%. This was because of bad news about the fourth largest investment bank in the United States, Lehman Brothers Holdings, having to file for Chapter 11 bankruptcy the next day. This is the largest bankruptcy in US history.Earlier in the year the fifth largest investment bank, Bear Stearns, was on the verge of going bankrupt until the Federal Reserve Bank of New York gave them a emergency loan and JP Morgan Chase bought the company out at $2 per share. Lehman Brothers filing for bankruptcy was not as big of a concern compared to what could have happened to the American International Group (AIG).

The American International Group is the world's largest insurance company. It is 18th largest company in the world. American International Group helps provide insurance, financial and investment products to businesses and to individuals in 130 countries around the world. The American International Group is the largest insurance company for aircraft companies in the world, insures many telecommunication companies, insures ports around the world that may have exposure to natural disasters and own Ocean Financing which is the United Kingdoms that has exposure to the housing market. In short, if something happens to a business and they need insurance, AIG helps provide insurance.

For certain individual households a lot of people may use Allstate, State Farm or some local insurance company. The American International Group had reported a lot of problems on their balance sheet. This is just a financial document that shows the financial condition of a company. In the business world this is an extremely important document because the balance sheet shows many things such as what a company owns and what they need to pay off in the short and long term. AIG was in a lot of trouble because of the Lehman Brothers bankruptcy. AIG had some financial concerns when it came down to its mortgage backed securities. Investors were concerned because they reported worse numbers than Lehman Brothers who filed for bankruptcy earlier that week. The big investors then started selling AIG so fast that they almost went bankrupt. 

On Wednesday September 18th, 2008 AIG's stock price went all the way down to $1.25. That is about a 96% drop in one year. Investors were very negative on their future and did not just start selling AIG but investors started to sell the financial stocks at fast rates. The financial stocks make up almost 20% of the entire stock market. If this sector has huge declines then most of the sectors that have anything to do with the financial stocks will get hit hard. So on Wednesday the Dow Jones Industrial Average, the largest index fund, fell more than 5%. Investors were very worried about AIG because if  they declared bankruptcy our economy might be forced into a depression. If you thought that the two declines during this week then you would have missed some that would have been catastrophic. 

A few hours after the stock market closed on Wednesday September 18th, 2008 the US Treasury reported that they would provide AIG with an $85 billion dollar emergency loan for 2 years. With this loan the US Government would control 79.9% of the largest insurance company in the world. If this had not happened then there is a possibility that on Thursday September 19th, 2008 if you went to an atm and wanted to withdraw cash there might not be any cash that would have come out. 

The United States Government did so much in these past few days, especially the Treasury Secretary Hank Paulson, than President Franklin Roosevelt did in his time during the Great Depression. 

Tell me what you think about this economic crisis that is currently going on.