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Federal Investigation Raises Questions About Federal Reserve Bank of New York's Bailout of AIG



The Government Accountability Office (GAO) posed serious questions about how the Federal Reserve Bank of New York conducted the 2008 bailout of American International Group Inc. (AIG). Recently reported findings of a federal investigation overseen by congressional investigators reveal that the Federal Reserve did not fully account for its authorization to conduct the AIG bailout. Admittedly, the New York Federal Reserve was not held to a heightened standard of documentation and explanation for its legal interpretation of statutes and regulations that permit emergency loans to non-banks in crisis situations. However, the investigation revealed the Federal Reserve Bank fell far below this standard in not having any analysis prepared in some instances to support its exercised authorization with respect to AIG's bailout, or an incomplete analysis, at best, in other instances.

Details of the AIG Bailout

The Federal Reserve Bank's bailout of AIG amounted to at least an $85 billion-dollar price tag for the emergency loan. The timing of the AIG bailout was unfortunate, as well. Only one day prior, Lehman Brothers Holdings Inc. filed for bankruptcy protection under Chapter 11.

The AIG bailout was technically exercised as part of the Federal Reserve's emergency powers. As such, the federal bank has the ability during a time of financial distress and panic to assist companies in financial crisis to prevent further, broader-based fiscal breakdowns in the nation's economy. The Federal Reserve is likewise permitted, in such exigent situations, to establish broader programs for aid and lending. Yet, many critics were not surprised when Congress completely eradicated the Federal Reserve's authority to bail out individual firms and companies in 2010. This was due in large part to the perceived (if not actual) abuses exercised during the 2008 emergency aid and lending practices.

Federal Reserve Bank Views the AIG Bailout Optimistically

Federal Reserve Bank General Counsel Scott Alvarez commented in response to the GAO's report that the investigation reveals that the Federal Reserve was successful in its efforts. Alvarez explained that the Federal Reserve was able to preserve and safeguard taxpayers' monies on one front, while trying to bring more stability to AIG's financial picture and the nation's overall economy simultaneously. The Federal Bank's public relations point person, David Skidmore, echoed the rosy view of the AIG bailout. Mr. Skidmore stressed the Federal Reserve's view of the GAO finding that the bank acted within its designated powers in providing emergency loans to AIG. Conspicuously absent, however, from Mr. Alvarez's letter to the GAO was any discussion whatsoever of the legal authority for exercising any exigent lending rescue efforts.