The Congressional Oversight Panel released a critical report of the 2008
rescue of insurance giant AIG. The panel says the $182 billion bailout
distorted financial markets by sending the message that taxpayers will
“pay any price and bear any burden to prevent the collapse of America’s
largest financial institutions.”
“When we hit the AIG problem, there’s a real moral hazard,” explains
Harvard Professor Elizabeth Warren, who chairs the panel that issued
this report. “When you say the government does an entire rescue, funds
it all and puts it all on the taxpayer.”
The Treasury Department responded to the report by saying the panel
overlooked the fact that the global economy was on the brink of collapse
and that the government only had a few hours to make critical decisions
on a rescue package.
Treasury Secretary Timothy Geithner, who engineered the AIG bailout,
defended the move in Congress in January. “We acted because the
consequences of AIG failing would have been catastrophic for our economy
and for American families and businesses,” he said.
But Warren says the panel took the impending global economic crisis into
deep consideration when analyzing the AIG rescue.
“What we’re really trying to push on is the notion that if the Federal
Reserve had taken a closer look at what was happening with AIG earlier
and if it had explored alternative options, we might not have been in
the position of a 100 percent bailout,” she says.
Though the panel’s report is quick to point out holes in the AIG
bailout’s logic, Warren says the current administration has put in an
effort to come up with a way to reverse the moral hazard. She emphasizes
the data works well within the context of the current national debate on
regulatory reform, and that examining the issues surrounding the crisis
could help avoid future problems of this magnitude. “There’s a real
advantage to looking through what happened in the AIG circumstances and
pointing out options that were available so that maybe the people who
face that crisis will keep those options in mind.”