AIG rescue plan sparks Hill concerns

Senior lawmakers raised concerns Tuesday over the Federal Reserve’s $85-billion rescue plan to save insurance giant AIG, fearing the cost and ramifications of the unprecedented move to stabilize the financial markets. 

In the Capitol late Tuesday, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson met with House and Senate lawmakers to inform them that the government was prepared to make a dramatic reversal and give an emergency loan to the nation’s largest insurance firm. 

{mosads}“Actions that were inconceivable just days ago are now occurring in a manner and at a pace that is certainly cause for concern,” said Sen. Christopher Dodd (D-Conn.), the chairman of the Banking Committee.

Dodd said his committee would press the administration for answers on its strategy to stabilize the markets, the costs to taxpayers and whether the actions will contribute or resolve the uncertainty in the financial markets.

“Above all, I continue to believe that the administration needs to become much more aggressive about addressing the root cause of this entire economic crisis — namely, the foreclosure crisis,” Dodd said. “Only when foreclosure rates start to drop significantly will we see home prices begin to level out and our markets regain much-needed stability.”

Paulson is expected to testify before the Banking Committee Thursday, with Bernanke expected next Tuesday, Dodd told reporters in the Capitol.

The move came after the Bush administration took over mortgage giants Fannie Mae and Freddie Mac and engineered a rescue plan earlier this year for Bear Stearns, another Wall Street institution. But it was signaling that it would take a hands-off role after stating over the weekend that it would not bail out Lehman Brothers, one of Wall Street’s biggest firms, which filed for bankruptcy this week and allowed Merrill Lynch & Co. to be bought by Bank of America. The Fed also decided Tuesday to keep interest rates steady, sending a signal that the government planned to watch the financial turmoil play out.

But unable to engineer a private deal for AIG, the administration decided to step in, according to lawmakers. 

“The Treasury and the Fed have promised to provide more details in the near future, which I believe must address the broader, underlying structural issues in the financial markets," said Senate Majority Leader Harry Reid (D-Nev.), following his meeting with Paulson and Bernanke.

Signs that the Fed may bail out AIG were starting to emerge earlier in the day. Sen. Richard Shelby (R-Ala.), the ranking member on the Banking Committee, who has criticized government bailouts, said he asked Paulson how the administration draws the line over when to bail out federal entities. "He didn't give me a satisfactory answer," Shelby said. 

Sen. Charles Schumer (D-N.Y.), chairman of the Joint Economic Committee, called the move "unprecedented."

"Hearing of these plans, you have to stop to catch your breath," Schumer said. "But upon reflection, the alternatives are much worse."

House Speaker Nancy Pelosi (D-Calif.) argued that “the Bush administration’s eight long years of failed deregulation policies” triggered the need for the bailout.

“An $85 billion loan is a staggering sum and is just too enormous for the American people to bear the risk; Congress will demand answers to prevent this from happening again,” Pelosi added.