Bernanke (again) defends AIG bailout
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For some reason, Federal Reserve Chairman Ben S. Bernanke today felt compelled to explain, again, why the central bank bailed out American International Group last fall.
In a speech at Morehouse College in Atlanta, Bernanke raises and answers ‘Four Questions About the Financial Crisis.’ The fourth question: ‘Why did the Fed and the Treasury act to prevent the bankruptcy of some major financial firms?’
Bernanke has previously said that the bailout of insurer AIG made him angrier than any other aspect of the financial crisis.
‘As a general rule, my strong preference is that any firm that cannot meet its obligations should bear the consequences of the marketplace,’ the Fed chief said in the speech today. But the circumstances around AIG’s near-collapse in September were ‘extraordinary,’ he said.
From the speech:
Many other serious consequences would have followed from a default by AIG: Insurance policyholders would have faced considerable uncertainty about the status of their policies; state and local governments, which had lent more than $10 billion to AIG, would have suffered losses; workers whose 401(k) plans had purchased $40 billion of insurance from AIG against the risk of loss would have seen that insurance disappear; and holders of AIG’s substantial quantities of commercial paper would have also borne serious losses. Conceivably, its failure could have triggered a 1930s-style global financial and economic meltdown, with catastrophic implications for production, incomes, and jobs.
OK, so there’s the defense, once more, for what has become a $180-billion U.S. bailout of AIG.
Bernanke conceded that ‘the American people also quite correctly see as unfair that AIG was saved from bankruptcy because of the dangers to the system that its failure would have posed, even as many other companies, including nonfinancial and smaller financial firms, have not received the same treatment.’ . . .
And as he has in the past, he pledged to make sure an AIG-style bailout can’t happen again, by working toward tighter regulation of ‘all types of financial institutions.’
The Obama administration already has proposed a radical overhaul of the federal regulatory framework to make sure that huge non-bank financial entities like AIG won’t escape U.S. oversight. The government, Bernanke said, must be able to step in decisively when a large financial company is threatened with failure, instead of just throwing taxpayers’ dollars at it, AIG-style.
‘An effective regime would also provide the authorities greater latitude to negotiate with creditors and to modify contracts entered into by the company, including contracts that set bonuses and other compensation for management,’ he said.
-- Tom Petruno