Bernanke defends AIG rescue

United States Federal Reserve chairperson Ben Bernanke on Tuesday defended the government’s latest bailout of embattled insurer AIG, telling irate lawmakers that he was also angry, but that the failure to act could have triggered an economic disaster.

Bernanke, in testimony to the Senate Budget Committee, gave a grim view of US economic prospects, saying labour market conditions may have worsened in recent weeks. His comments helped drive the stock market briefly lower.

Pressed by the Senate committee to justify the latest in an expanding series of bailouts for American International Group (AIG), Bernanke said there was no alternative, even though the company had been irresponsible.

“We know that failure of major financial firms in a financial crisis can be disastrous for the economy. We really had no choice,” he told the panel.

The US government threw a fresh $30-billion lifeline to AIG on Monday, as part of a restructured bailout that had earlier swelled to about $150-billion.

AIG, which reported a record $61,7-billion quarterly loss on Monday, has been slammed by losses on its credit default swaps that guarantee mortgage-linked securities.

Lawmakers told the Fed chairperson that public patience has worn thin over the generous support for the foundering insurer even as smaller firms and households are taking heavy hits from the slumping economy.

“Right now, small businesses across the country, who played by the rules, paid their bills on time, can’t get a line of credit, while AIG seems to have an open spigot for taxpayer money,” said Senator Ron Wyden, a Democrat.

Bernanke said AIG’s extensive relationships with banks around the globe presented the risk of “contagion” should the company fail, and said authorities were working hard to try to neutralise dangerous positions.

“We have been doing what we can to break the company up, to get it into a saleable position and to try to defang it,” he said.
“If there’s a single episode in this entire 18 months that has made me more angry, I can’t think of one [other than] AIG,” Bernanke added, equating the company’s financial services division with an unregulated hedge fund.

Wider budget gap a necessary evil
Bernanke told the committee that restoring stability to the battered financial sector was a prerequisite to a recovery from the deep US recession, and said a surge in US government debt was unavoidable.

“We are better off moving aggressively today to solve our economic problems,” he said. “The alternative could be a prolonged episode of economic stagnation that would not only contribute to further deterioration in the fiscal situation, but would also imply lower output, employment and incomes for an extended period.”

In addition to the likelihood of a worsening jobs market, Bernanke said many businesses are burdened with excess inventories and are likely to cut production further in the months ahead.

The collapse of the US housing market bubble has set off a chain reaction, tipping economies around the world into recession, and heaping fiscal strain on governments.

A budget proposal released by the White House last week envisioned a record budget deficit of $1,8-trillion this year, and a rise in the ratio of debt to gross domestic product to about 60% from 40%—the highest level since the early 1950s.

“All else equal, this is a development that all of us would have preferred to avoid,” Bernanke said.

He said a decision on whether the government needs to increase the size of a $700-billion bank rescue package would depend on bank “stress tests” being conducted by regulators and the direction of the economy.—Reuters

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