Bernanke: AIG failure would have been 'devastating' to financial system
In response to questions from the Senate Banking Committee, Bernanke reiterated that wholesale nationalization of the U.S. banking system would not be necessary and that is not the government's plan. However, at the same time, Bernanke added that the banking bailout may need more money beyond the $700 billion Congress has already approved.
During the past 18 months, the Fed's balance sheet has more than doubled to $1.9 trillion as it has sought to stabilize key financial institutions, such as Citigroup (C) and AIG (AIG).
Further, Bernanke provided his clearest statement to-date regarding the implications of a potential AIG failure. "A failure of AIG would have been devastating for the U.S. financial system. Nothing makes me angrier than AIG's circumstance...And I share your anger, Senator," Bernanke said, C-SPAN reported.
Still, Bernanke remains optimistic regarding the ultimate effectiveness of the federal government's interventions. "I think we will eventually get results, we will eventually stabilize the financial system...and the economy will return to growth," Bernanke said.
AIG may need $300-500 billion more?
One economist told DailyFinance Tuesday that effectiveness may hinge on more, assertive action by the Fed with respect to AIG. Economist David H. Wang, whose specializations include credit analysis, said he believes AIG "may need $300-500 billion more in Fed assistance, depending on the extensiveness of its operations."
"AIG is intertwined in the global financial system with a myriad of credit default swap products, derivatives, and other financial products," Wang said. "Based on what I've reviewed about their operations so far, I would be very surprised if AIG did not need at least another $200 billion more in assistance, and most likely more."
Still, Wang expressed full-confidence in Bernanke's strategy to-date. "Bernanke has data you or I can not review," Wang said. "While one can critique minor tactics, I do not doubt for a minute that had the Fed not intervened with AIG, and AIG failed, the consequences for the U.S. and global financial systems would have been devastating. An AIG failure would have made the fall-out from the Lehman Brothers failure look like a picnic."
Monetary / Economic Analysis: In testimony, Bernanke also said there were limits on how high the U.S. national debt could go, but did not specify a percent of GDP ceiling. The U.S. is trending toward a national debt equaling 60% of U.S. GDP -- high but not unprecedented, he said, and the ultimate arbiter of the ceiling would be the international financial community, and it's very hard to know when they would balk.
The good news there: That gives the U.S. more 'resource room-leeway' to add debt, if needed, for financial system stabilization. To be sure, no one wants to add more debt, but if economist Wang is correct about AIG's health, the U.S. -- and other governments around the world, for that matter - - have no other choice.