By Brady Dennis
Washington Post Staff Writer
Wednesday, March 4, 2009
Federal Reserve Chairman Ben S. Bernanke delivered an unusually harsh rebuke to American International Group yesterday, expressing rare public exasperation over having to repeatedly bail it out.
"I think if there's a single episode in this entire 18 months that has made me more angry, I can't think of one, than AIG," said the characteristically reserved central banker.
Bernanke had arrived on Capitol Hill for what was billed as a Senate hearing on the federal budget. Instead, he ran headfirst into a fresh wave of frustration about the latest federal rescue of the wounded insurance giant.
"Mr. Chairman," Sen. Ron Wyden (D-Ore.) asked as the hearing began, "at what point will the taxpayer no longer be on the hook for the massive AIG failure? What is the endgame for American taxpayers?"
Bernanke acknowledged that the "AIG situation is obviously a very uncomfortable one." But he maintained that because the company has ties to major financial firms across the globe, its collapse "would be devastating to the stability of the world financial system."
The Fed chairman did his best to counter the lawmakers' frustrations with his own. "I share your concern. I share your anger. It's a terrible situation," he said. "But we're not doing this to bail out AIG or their shareholders, certainly. We're doing this to protect our financial system and to avoid a much more severe crisis in our global economy."
Bernanke said much of his anger stems from the way AIG strayed from its core insurance business and took unmonitored and unnecessary risks through its Financial Products unit, which wrote billions of dollars in exotic derivative contracts that faltered and nearly destroyed the parent company.
"AIG exploited a huge gap in the regulatory system," Bernanke said. "There was no oversight of the Financial Products division. This was a hedge fund, basically, that was attached to a large and stable insurance company, made huge numbers of irresponsible bets -- took huge losses. There was no regulatory oversight because there was a gap in the system."
When Financial Products imploded, it left the government with a dilemma.
"We had no choice but to try to stabilize the system because of the implications that the failure would have had for the broad economic system," Bernanke said. "We know that failure of major financial firms in a financial crisis can be disastrous for the economy."
On Monday, AIG announced a loss of $61.7 billion for the fourth quarter of 2008, the biggest quarterly corporate loss in U.S. history. The federal government simultaneously announced that it would once again restructure the terms of the AIG bailout, which began in September and had grown to a $152 billion total package.
The new deal gives AIG access to another $30 billion in taxpayer funds, eliminates some costly dividend payments and grants the government direct stakes in two of the company's largest insurance subsidiaries.
Yesterday afternoon, during another budget hearing before the House Ways and Means Committee, it was Treasury Secretary Timothy F. Geithner's turn to explain the government's ever-growing rescue of AIG to irate lawmakers.
"AIG is a huge, complex, global insurance company, attached to a very complicated investment bank hedge fund that built -- that was allowed to build up without any adult supervision, with inadequate capital against the risks they were taking, putting your government in a terribly difficult position," Geithner said.
"And your government made the judgment back in the fall that there was no way that you could allow default to happen without catastrophic damage to the American people."