Why we bailed out aig

N in , describing how policymakers sought to avoid giving AIG shareholders a "windfall" through a rescue. They have also pushed officials to confirm that the situation was so dire that the government would have moved to save AIG even if the company had refused the initial offer.

Bernanke also testified that he did not know, at the time the loan terms were drafted, what the exact basis was for the interest rate or other fees added to the loan were. A lawyer for the insurance giant's former chief executive, Maurice "Hank" Greenberg, was expected to argue that the government unlawfully sought to punish AIG shareholders with excessively harsh terms. Starr filed lawsuit, to considerable public scorn, in November A timeline of the financialcrisis. Government lawyers have defended the actions as appropriate, pointing out that the deal had been approved by the AIG board, as the company faced no other alternative to bankruptcy.

Lawyers at the U. The implications of the first telling are largely legal. The implications of the second telling are largely technical, managerial, and psychological. Treasury, the AIG bailout story remains highly controversial. And why is this story still so controversial? Controversy over the bailout was present from its earliest days, starting in September when many members of Congress and allied non-interventionists raised their voices against the plan being put in place by the U.

Treasury and the Federal Reserve Bank. These critics saw the bailout as an inexcusable breach of market discipline. For these critics, the AIG bailout story is just about as pure an example as there is of how cronyism and lack of transparency have corrupted American capitalism. If the answers to these two questions are positive, then AIG should indeed be branded as a paradigmatic case of crony capitalism and the dishonor that goes with this label.

This may well be the case, but it is worth testing whether or not such a telling of the AIG bailout story is accurate. The only bank willing to buy Lehman and its toxic assets that chaotic weekend was the British firm Barclays—and British regulators balked before a deal could be finalized. That left the Fed without options. But really, they had been powerless. They knew the consequences of failure would be disastrous. They would have been thrilled to find a way to save Lehman.

In fact, a subsequent study by economists William R. Cline and Joseph E. I guess some people find it comforting to believe the government could have snapped its fingers and ended the crisis early. The perennial question is how, if the Fed lacked authority to rescue Lehman, it somehow found the authority to rescue AIG the next day.

The short answer is that AIG, despite the awful misjudgments of a subsidiary that insured trillions of dollars worth of mortgage securities, had valuable revenue-generating businesses and a plausible claim to solvency.