Bernanke: AIG shows urgent need for new regulations
WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke said on Tuesday the September rescue of American International Group was warranted to avoid a potential 1930s style meltdown, but underlined new rules are required.
"AIG highlights the urgent need for new resolution procedures for systemically important nonbank financial firms," Bernanke told the House of Representatives Committee on Financial Services.
"Second, the AIG situation highlights the need for strong, effective consolidated supervision of all systemically important financial firms," he said.
Bernanke stoutly defended the decision to prop up the firm, whose demise just a day after the bankruptcy filing of investment bank Lehman Brothers would have been a disaster.
"At best, the consequences of AIG's failure would have been a significant intensification of an already severe financial crisis and a further worsening of global economic conditions.
"Conceivably, its failure could have resulted in a 1930's-style global financial and economic meltdown, with catastrophic implications for production, income and jobs."
The United States government's September 16 rescue of the insurance giant has totaled around $180 billion, and there has been anger among ordinary Americans over its payment on March 15 of $165 million in bonuses.
"My reaction upon becoming aware of these specific payments was that, notwithstanding the business purposes that might be served by this action, it was highly inappropriate to pay substantial bonuses to employees of the division that had been the primary source of AIG's collapse," Bernanke said.
He tried to stop these payments, but was warned that if the lawsuit failed, it could end up with the bonus recipients getting two or three times as much money, owing to substantial punitive damages provided under Connecticut law.
This assessment of the state's rules was disputed by Connecticut Attorney General Richard Blumenthal, who said that if Bernanke wanted to sue AIG, he would have had his blessing.
"The Federal Reserve never contacted me or my office concerning the applicability of the Connecticut wage law to the AIG bonuses. If the Fed had called, we would have given the green light for litigation blocking these unconscionable bonuses," Blumenthal said in a statement.
