Obama aide: No fixed rules on too big to fail

LAS VEGAS (Reuters) - There are no hard and fast rules to determine which financial firms are "too big to fail," a senior adviser to Democratic White House hopeful Barack Obama said on Wednesday.

Jason Furman, a top economic aide to Obama, told Reuters that taxpayer-funded bailouts are always a last resort, but decisions must be made on a case-by-case basis and take into account whether the failure of a firm would cause significant harm to the financial system and the economy.

"Every situation is unique. It's impossible to develop hard and fast rules, but you want to do the most you possibly can to protect taxpayers while ensuring that the economy remains strong," Furman said in a telephone interview.

Following the Fed's $85 billion rescue of insurer American International Group, Obama issued a statement that neither criticized nor explicitly endorsed the decision.

"While we do not know all the details of this arrangement, the Fed must ensure that the plan protects the families that count on insurance," Obama said. "It must not bail out the shareholders or management of AIG."

Obama, an Illinois senator, was critical of some details of the Fed's rescue in March of investment bank Bear Stearns, but did not disagree with the decision to provide a credit line to encourage the firm's sale to J.P. Morgan Chase.

He also generally agreed with the government takeover of mortgage giants Fannie Mae and Freddie Mac this month, saying their collapse would have resulted in too big a blow to the financial system. In the case of Lehman Brothers, Obama did not favor a bailout.

FOUR QUESTIONS CAN GUIDE DECISION

Asked to comment on Obama's view of whether the AIG bailout was warranted, Furman said, "Sen. Obama's statement on AIG speaks for itself."

The McCain campaign criticized Obama's unwillingness to take a stand on the AIG bailout.

"With the financial security of millions of hard-working Americans at stake, we can't afford a president who just votes 'present,'" McCain spokesman Brian Rogers said.

Though Obama and his aides believe there are no fixed rules on when a government bailout is needed, former U.S. Treasury Secretary Lawrence Summers, a veteran of the Asian financial turmoil and other crises during the 1990s, says four questions can help guide a decision on what is too big to fail.

Summers, one of a group of former top U.S. officials who are advising Obama on the current financial crisis, told Reuters on Tuesday the key questions are:

1) Is the problem surrounding the firm one of liquidity or one of solvency? In other words, is the company broke or does it need a loan to get it through a rough patch?

2) How much of a risk is there that the company's problems could cause a larger contagion if it fails?

3) How fragile is the environment in the broader financial markets?

4) Would there be a framework in place for the taxpayers to be able to recover some government funds used for the bailout?

Furman said Summers' four questions were broadly consistent with Obama's thinking.

Summers said the decision on whether the government should intervene should "always be made on a pragmatic basis" and that it is always preferable to avoid putting taxpayer money on the line.

But he added, "To make an absolute prohibition is the kind of thinking that made the Depression 'Great.'"

The Obama campaign highlighted remarks from Republican John McCain, Obama's rival in the November 4 election, in which McCain initially ruled out using taxpayer money to bail out AIG.

Later, McCain and his running mate Sarah Palin indicated they thought the Fed's decision was understandable under the circumstances.

(Reporting by Caren Bohan, Editing by Eric Walsh)