WASHINGTON -- Federal Reserve Chairman Ben Bernanke, dropping his typical sober and professorial demeanor, said no episode in the current financial crisis has angered him more than the need to rescue American International Group Inc.
"If there's a single episode in this entire 18 months that has made me more angry, I can't think of one, than AIG," he told the Senate Budget Committee. "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, made huge numbers of irresponsible bets, took huge losses. There was no regulatory oversight because there was a gap in the system."
Mr. Bernanke said the Fed "really had no choice" but to stabilize the company in September because the failure of a major financial firm in a crisis "can be disastrous for the economy." With millions of policyholders and thousands of derivatives and credit-insurance counterparties, Mr. Bernanke said AIG's downfall would have been "devastating to the stability of the world financial system."
"If there's been any doubt about the power of financial stress to affect the real economy, I hope that it's been removed at this point," he said.
Mr. Bernanke defended the latest government injections into AIG -- putting the total commitment at more than $170 billion -- and said the actions would help stabilize the firm and carry out spinoffs and sales of noncore units.
"We don't know for sure what the future will bring. We don't know how the financial system will evolve or how the economy will evolve. But I do think that this does give us the best chance both to achieve financial stability and as well to ultimately recover most or all of the investments that the public has made in AIG," he said.
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