Fed Chief Blasts AIG For Exploiting Reg System

Federal Reserve Board Chairman Ben Bernanke blasted American International Group at a Senate hearing today, saying “nothing has made me more angry” than AIG's ability “to exploit a huge gap in the regulatory system.”

Mr. Bernanke made his comments while testifying before the Senate Budget Committee hearing on President Barack Obama's proposed budget for the remainder of fiscal-year 2009.

Mr. Bernanke used the occasion to suggest, as he did last week, that the Obama administration expand the authority of the Federal Deposit Insurance Corp. to deal with large, troubled financial institutions, such as insurance companies, securities firms, hedge funds and mutual funds, that aren't banks.

“We have no structure–no legal and regulatory structure–that allows us to resolve in a safe and sound way a large financial international conglomerate,” he said.

“We're much better off, frankly, trying to resolve it within the context of continued operation than to allow it to fail and allow all the chaos that would occur following a bankruptcy,” Mr. Bernanke said.

He justified the decision to provide more than $100 billion in aid to AIG by saying federal officials “really had no choice” but to provide aid to AIG in September.

The failure of a major financial firm in a crisis “can be disastrous for the economy,” he said.

With millions of policyholders and thousands of derivates and credit-insurance counterparties, Mr. Bernanke said AIG's downfall would have been “devastating to the stability of the world financial system.”

He added, “If there's been any doubt about the power of financial stress to affect the real economy, I hope that it's been removed at this point.”

Responding to questions from a host of senators at the hearing, Mr. Bernanke said, “If there's a single episode in this entire 18 months that has made me more angry [than AIG], I can't think of one.”

He added, “AIG exploited a huge gap in the regulatory system. There was no oversight of the financial products division.”

Mr. Bernanke argued that AIG “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.”

And in answering a question from Sen. Patty Murray, D-Washington, Mr. Bernanke linked AIG's solvency to the welfare of “just average everyday families.”

Definitely, Mr. Bernanke said, talking about the “potential for contagion.”

“In this case, we're dealing with the largest insurance company in the world,” Mr. Bernanke said.

The failure of AIG “would have sent shockwaves through the entire insurance industry” and likely beyond, he said.