Asian Journal- The Filipino-American Community Newspaper

BAIL out and bankruptcies are two words that have made headlines recently. Hundreds of billions of Federal bail out funds have been given to the banking and financial industry and to the big 2 carmakers, GM and Chrysler, in the last 3 months. Bail out funds was given to AIG, the biggest American insurance company, to save it from bankruptcy.

AIG guaranteed billions of toxic mortgages given by banks. When homeowners started defaulting, these banks called on AIG to pay them for the defaulting loans, which were guaranteed by AIG. If AIG did not receive Federal bail out funds, it would not have enough cash to honor these guarantees. In that situation, AIG would be technically bankrupt because it would not have the financial capacity to pay the guarantees that it issued. Wachovia, Countrywide, Lehman Brothers, Bears & Stearns, Washington Mutual were all financial titans that all went bankrupt in the last few months due to the mortgage meltdown. The big 2 carmakers are both bankrupt being kept afloat for the next 60 days by bail out funds. The CEO of GM has been sacked and replaced by an Obama appointee. President Obama said last week, that the government guarantees all warranties issued by GM & Chrysler, and that GM and Chrysler may be knocking on the doors of bankruptcy court soon.

Is bail out and bankruptcy synonymous? Certainly, these banks and corporations would not have needed bailouts to continue operating if they were not bankrupt or on the brink of bankruptcy. A bail out involves the infusion of new cash in the form of loans or capital enabling the borrower to continue operating in its original form. Without bail out funds, the borrower is not able to meet debt payments, which are coming due and would have to face the consequences of defaults in payments of obligations, which are due. New funds put the borrower on life support, so to speak, so the borrower can live for another week, or another month. If the borrower needs new funds to buy an extension of life, isn’t that borrower very sick? Indeed it is. Without new funds, the borrower would just collapse and die. Thus, the recipients of major bail out funds have all been too big to die, so they say. According to Obama, if AIG were not given bail out funds, it would drag the whole US economy, and thus, the whole world economy down the drain, as a giant octopus would. It’s hard to imagine that the biggest economy in the world would die, if AIG died, even if it were the largest American insurance company. But that is what the prophets of doom and gloom say, and they are presently in charge.