Boston Federal Reserve Bank President Eric Rosengren said the government should have taken control of the giant insurer AIG when it failed last year but didn’t have the legal power to do so.
In a speech to newspaper publishers, he said the Fed and Treasury couldn’t let the free market take care of AIG, because the financial system was in danger. The government ended up putting $180 billion into the company.
“I believe AIG’s failure could well have caused cascading failures of many financial institutions, reminiscent of the Great Depression,” Rosengren said.
“This would have further frozen credit creation, and the end result would likely have been an even higher, I believe much higher, national unemployment rate than the very high rate we see now.” Unemployment registered 10 percent in November.
What would have been the ideal approach to AIG?
“Faced with a rapid and disorderly failure, the best outcome – hypothetically – would probably have been for the government to take over AIG,” Rosengren said.
“The shareholders would have been wiped out, management removed and the company placed in receivership. While that sounds rather grave, such a relatively orderly government takeover would have avoided many of the consequences of the disorderly failure.”
Despite the government bailout, concerns remain about the company. Investment research firm Sanford Bernstein recently issued a report saying AIG’s reserves are $11.9 billion less than they should be to pay out estimated claims in its property and casualty division.
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