The Federal Reserve's last-minute rescue of insurance giant American International Group has put taxpayers on the hook for big bucks again, but not intervening would have posed even greater financial risks here and abroad.
The U.S. economy would have taken a terribly costly hit if AIG slid into bankruptcy, and the pain would have radiated through all sectors. Instead, the Fed agreed to loan AIG $85 billion to meet its obligations in a decision that two days ago seemed unthinkable for Fed Chairman Ben S. Bernanke and U.S. Treasury Secretary Henry M. Paulson Jr. They had said as much.
But the potential fallout of AIG failing left them with little choice. Wall Street hadn't yet recovered from last weekend's jolt of two titans crashing, investment leader Lehman Brothers' bankruptcy filing and the salvage sale of brokerage house Merrill Lynch. The aftershocks were felt right here in Baltimore as Constellation Energy Group's stock fell by a third in response. The fear factor explains why Chairman Bernanke and Secretary Paulson felt they had to prop up AIG in a record bailout that follows the government's takeover of mortgage giants Fannie Mae and Freddie Mac and the rescue of Bear Stearns.
As the subprime mortgage market imploded, AIG's complex insurance dealings and investments tanked, leaving it with a cascade of commitments it couldn't meet. The Fed's loan should resolve its immediate crisis. In the rosiest of scenarios, the government could even make money if AIG repays the loan. But these extraordinary developments reinforce the need to reimpose robust regulation on the industry. The "anything goes" mentality of the past few years has been a reckless misadventure that Congress, the Fed and the Bush administration all failed to stop.