GAO examines lessons learned from Fed's AIG bailout

Tuesday - 11/8/2011, 11:00am EST

Orice Williams Brown, director of Financial Markets and Community Investment, GAO

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By Jack Moore
Federal News Radio

During the height of the financial crisis in September 2008, the Federal Reserve Board authorized emergency lending to the foundering American Insurance Group.

Now, three years later, the Government Accountability Office has examined the Federal Reserve's emergency assistance as part of an ongoing broad look at lessons learned from the financial crisis.

Orice Williams Brown, GAO's director of Financial Markets and Community Investment, joined the Federal Drive with Tom Temin and Amy Morris to discuss the recent report, which centered, in part, on the key decisions that led to the approval of emergency lending.

"The government's unprecedented actions to save AIG from failure were controversial, raising questions in Congress and among the public about the federal government's intervention into the private marketplace," GAO auditors wrote in the introduction to the report.

Questions remain about whether AIG should have filed for bankrupty instead of receiving its tranche of government funds, whether the government assumed too much risk and how the government even came to its decision.

It turns out, Brown said, the Federal Reserve was given broad authority to deal with the crisis, "and what they did was not inconsistent with that authority."

However, Brown acknowledged it was, in many ways, "uncharted territory for the Fed."

The report does highlight some lessons learned. In the same way that the 2010 Dodd-Frank Wall Street Reform sought to apply lessons learned from the crisis, Brown said an examination of the Federal Reserve's early actions to stave off the crisis, also offers lessons.

They include:

  • Easing time pressure by seeking private-sector solutions more quickly

  • Analyzing disputes about collateral to better identify firms under stress

  • Conducting stress tests to anticipate the impact of government action or inaction on the financial system

FINANCIAL CRISIS Review of Federal Reserve System Financial Assistance to American International Group, Inc.