Here we go again: The Federal Reserve is bailing out another tanking financial institution—the insurance behemoth American International Group—by sinking $85 billion into AIG in return for a stake in the company. Meanwhile, House Speaker Nancy Pelosi has called for a Wall Street investigation following this latest startling agreement between big government and big business.
The New York Times:
Still, the move will likely start an intense political debate during the presidential election campaign over who is to blame for the financial crisis that prompted the rescue.
Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said Mr. [Henry] Paulson and Mr. [Ben] Bernanke had not requested any new legislative authority for the bailout at Tuesday night’s meeting. “The secretary and the chairman of the Fed, two Bush appointees, came down here and said, ‘We’re from the government, we’re here to help them,’ ” Mr. Frank said. “I mean this is one more affirmation that the lack of regulation has caused serious problems. That the private market screwed itself up and they need the government to come help them unscrew it.”
The decision was a remarkable turnabout by the Bush administration and Mr. Paulson, who had flatly refused over the weekend to risk taxpayer money to prevent the collapse of Lehman Brothers or the distressed sale of Merrill Lynch to Bank of America. Earlier this year, the government bailed out another investment bank, Bear Stearns, by engineering a sale to JPMorgan Chase that left taxpayers on the hook for up to $29 billion of bad investments by Bear Stearns. The government hoped at the time that this unusual step would both calm markets and lead to a recovery by the financial system. But critics warned at the time that it would only encourage others to seek bailouts, and the eventual costs to the government would be staggering.
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