Fed Chief Says Insurance Giant Acted Irresponsibly

New York times.
Published: March 3, 2009
The Federal Reserve Chairman, Ben S. Bernanke,

“A.I.G. exploited a huge gap in the regulatory system,” Mr. Bernanke said. “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.” And this quasi-hedge fund, Mr. Bernanke went on, to nobody’s surprise, made irresponsible bets and took huge losses.

“We had no choice but to try to stabilize the system because of the implications that the failure would have had for the broad economic system,” he said.

Mr. Bernanke’s testimony came as Congress began the long process of considering President Obama’s spending plan, which envisions a deficit of $1.8 trillion this year and trillion-dollar deficits only slowly coming under control.

Senator Patty Murray, Democrat of Washington, pressed Mr. Bernanke on whether A.I.G.’s fate is really linked to the welfare of “just average everyday families.”

Definitely, Mr. Bernanke said, talking about the “potential for contagion.”

“In this case, we’re dealing with the largest insurance company in the world,” Mr. Bernanke said. “Its failure would have sent shockwaves through the entire insurance industry” and likely beyond.

Comment: I perfectly agree on the fact that A.I.G acted irresponsibly but who was expecting it?
No doubt about the huge gap in the regulatory system.
In my mind it is also correct the comment about the needs to stabilize the system.



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