Bernanke defends AIG rescue

AIG,which reported a 61.7 bn loss has been slammed by losses on credit default swaps.

Bernanke,in testimony to the Senate Budget Committee,gave a grim view of US economic prospects,saying labor market conditions may have worsened in recent weeks. His comments helped drive the stock market briefly lower.

Pressed by the Senate committee to justify the latest in an expanding series of bailouts for American International Group,Bernanke said there was no alternative,even though the company had been irresponsible.

8220;We know that failure of major financial firms in a financial crisis can be disastrous for the economy. We really had no choice,8221; he told the panel.

The US government threw a fresh 30 billion lifeline to AIG on Monday,as part of a restructured bailout that had earlier swelled to about 150 billion.

AIG,which reported a record 61.7 billion quarterly loss on Monday,has been slammed by losses on its credit default swaps that guarantee mortgage-linked securities.

Lawmakers told the Fed chairman that public patience has worn thin over the generous support for the foundering insurer even as smaller firms and households are taking heavy hits from the slumping economy.

8220;Right now,small businesses across the country,who played by the rules,paid their bills on time,can8217;t get a line of credit,while AIG seems to have an open spigot for taxpayer money,8221; said Senator Ron Wyden,a Democrat.

Story continues below this ad

Bernanke said AIG8217;s extensive relationships with banks around the globe presented the risk of 8220;contagion8221; should the company fail,and said authorities were working hard to try to neutralize dangerous positions.

8220;We have been doing what we can to break the company up,to get it into a saleable position and to try to defang it,8221; he said. 8220;If there8217;s a single episode in this entire 18 months that has made me more angry,I can8217;t think of one other than AIG,8221; Bernanke added,equating the company8217;s financial services division with an unregulated hedge fund.

WIDER BUDGET GAP A NECESSARY EVIL

Bernanke told the committee that restoring stability to the battered financial sector was a prerequisite to a recovery from the deep US recession,and said a surge in US government debt was unavoidable.

8220;We are better off moving aggressively today to solve our economic problems,8221; he said. 8220;The alternative could be a prolonged episode of economic stagnation that would not only contribute to further deterioration in the fiscal situation,but would also imply lower output,employment and incomes for an extended period.8221;

Story continues below this ad

In addition to the likelihood of a worsening jobs market,Bernanke said many businesses are burdened with excess inventories and are likely to cut production further in the months ahead.

The blue-chip Dow Jones industrial average,which closed below 7,000 for the first time in 12 years on Monday,dipped following Bernanke8217;s comments before rebounding as US President Barack Obama spoke separately.