AIG Bailout Can Pass A GAO Study, Suggests Fed's Bernanke

NU Online News Service, Jan.19, 3:42 p.m. EST

WASHINGTON–Federal Reserve Board Chairman Ben Bernanke defended his agency's actions today in bailing out American International Group and asked the Government Accountability Office to conduct a study of its decisions involving AIG.

He also offered to make available to the GAO all records and personnel necessary to conduct this review, and said the Fed provides detailed and continual information regarding its investment in AIG.

The request for a study was made in a letter to Gene Dodaro, acting U.S. Comptroller General.

It was made as the Fed has come under fire for not demanding "haircuts" when AIG's trading partners were paid off on credit default swap contracts whereby AIG guaranteed the value of the partner's investment in mortgage-backed securities and even risker and more complex collateralized mortgage obligations.

The House Oversight and Government Reform Committee has invited Mr. Bernanke to testify Jan. 27 at a hearing on issues raised by release of certain e-mails indicating that Fed officials told AIG officials to limit their disclosure in securities filings of the names of trading partners and the decision for AIG to pay the full value of the securities to those counterparties.

In his letter, Mr. Bernanke said the Fed had no authority to regulate any of AIG's operations and that its failure would have substantively exacerbated the economic crisis underway in mid-September 2008, when the Fed provided $82 billion in cash to AIG in return for 79.9 percent of its stock.

He also said in the letter that the Fed is on target to recoup its investment in AIG by September 2013.

"The Federal Reserve's credit facility is fully secured and should be fully repaid by September 16, 2013 as the company reorganizes and unwinds its operations," he said.

In the letter asking for the GAO evaluation, Mr. Bernanke said the GAO has authority to conduct a study, and defended his agency's action as responsible and appropriate.

He called it "important that Congress and the public understand that, in our actions regarding AIG, the Federal Reserve and the Treasury acted in the best interests of the United States to preserve the financial system and to protect households and businesses from potentially calamitous effects on the U.S. economy, while doing everything possible to protect the American taxpayer."

"In this spirit," he said, and "to afford the public the most complete possible understanding of our decisions and actions in this matter, and to provide a comprehensive response to questions that have been raised by members of Congress, the Federal Reserve would welcome a full review by GAO of all aspects of our involvement in the extension of credit to AIG."

In the letter, Mr. Bernanke defended the Fed's actions. He said none of AIG's operations were subject to Fed supervision, and that the agency extended the credit "to prevent the imminent disorderly failure of the company, an event that would likely have led to a significant intensification of an already severe financial crisis and a further worsening of global economic conditions."