Bernanke Not Happy About AIG Mess Amid Revised Bailout
Federal Reserve Chairman Ben Bernanke was critical of AIG while speaking before Congress this week. Coming on the heels of a new revised bailout plan for what was once the world’s largest insurer, it’s not surprising
“If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG,” Bernanke told lawmakers today. “AIG exploited a huge gap in the regulatory system, there was no oversight of the financial- products division, this was a hedge fund basically that was attached to a large and stable insurance company.
After the company reported the largest quarterly loss in history at over $61 billion, it became imperative for AIG to receive additional capital or face ensuing credit downgrades. This will likely cause a regulatory shake up in the insurance industry since much of AIG’s massive losses had very little to do with insurance.
The Treasury will create a new facility to make available an additional $30 billion in credit available to the struggling insurer. The questions is though, what are AIG’s losses likely to be in the upcoming quarters and how much more will it need to stay afloat.
AIG jumped into the unregulated derivatives market with abandon and for awhile that led to spectacular profit margins earlier in the decade but as we’ve seen when things go bad, all that leverage can be a double edged sword and can lead to equally spectacular losses. The housing crash and credit freeze that followed brought a spotlight to AIG’s massive exposure to insured credit and the resulting wave of defaults opened AIG up to liabilities that were largely unfunded.
The Federal Reserve, unfortunately now has to open itself to this exposure as well by having to reduce it’s $60 billion credit facility with the company in exchange for a preferred equity stake. It is estimated that the Fed’s exposure to AIG is now over $93 billion so it’s not surprising why Bernanke isn’t too happy with that.
