AIG bailout averted 1930s type meltdown: Bernanke

Federal Reserve Chairman Ben Bernanke will tell lawmakers today that providing billions of dollars in emergency loans to insurer AIG was a “difficult but necessary” step to support the U.S. economy and stabilize the financial system.

“We were very concerned about a number of other major firms that were intense stress,” Bernanke stated in prepared remarks for a hearing in Washington today.

The initial AIG loan for $85 billion was made on September 16, 2008, an “extraordinary time” when mortgage finance companies Fannie Mae and Freddie Mac had been taken over and Lehman Brothers had just filed for Bankruptcy, he said.

The firm faced severe liquidity pressures that threatened to force it imminently in to bankruptcy, Bernanke said. The company’s failure “would have posed unacceptable risks” for the global financial system and the economy he said.

“The banks’ combined exposures exceeded $50 billion. Money market mutual funds and others that held AIG’s roughly $20 billion of commercial paper would also have taken losses,” he said.

Direct damage to AIG’s counterparties was just part of the problem, he said. Like Lehman, AIG’s failure would have caused further problems in the money market mutual funds, raised uncertainties about insurance products and could have led to a run on the broader insurance industry, he writes.’

“Conceivably, its failure could have resulted in a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income, and jobs,” he said.