Anxieties grow among Republicans

Republican lawmakers and conservative leaders are angry about the latest in a string of government bailouts announced less than a month after they renewed their pledge to control federal spending.

The Federal Reserve on Tuesday announced an $85 billion bailout of the insurance giant American International Group (AIG), surprising many lawmakers, both Democrats and Republicans, who had received little information in the preceding days.

{mosads}Conservatives on and off the Hill said this week’s massive bailout violated free-market principles and encouraged reckless behavior in the future.

“I’m dubious,” said Sen. Jeff Sessions (R-Ala.). “I have not heard why its failure would cause catastrophic market dislocation. The question is, where do you stop? What company do you bail out next?”

Leaders from both parties faulted the lack of a communications effort by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke.

Senate Majority Leader Harry Reid (D-Nev.) told reporters that he received no consultation from Paulson or Bernanke before he met with them late Tuesday. By that time the deal had been set.

“They were not there asking us what to do, they were there telling us what they were going to do,” Reid said of the meeting with the two officials. The Federal Reserve will lend $85 billion to the insurance giant in return for an 80 percent stake in the company, effectively taking it over.

The Bush administration’s action left many Republicans puzzled. They had applauded Paulson’s decision over the weekend not to bail out Lehman Brothers, the prominent investment bank that declared bankruptcy Sunday night.

“Many Republicans felt the signal sent by the Lehman Brothers action was a positive sign that the government wasn’t always going to be there to assume the worst of the risk,” said House Republican Whip Roy Blunt (Mo.). “The AIG decision confuses that signal quite a bit. I think it’s important that both Secretary Paulson and Chairman Bernanke or their designees come up and explain to us why that latest decision had to be made in light of the Lehman Brothers decision.”

Republican Conference Chairman Adam Putnam (Fla.) voiced the same concern.

“The communication lines are not operating effectively,” he said.

Rank-and-file Republicans offered harsher assessments.

“I really resent the privatization of profit and the socialization of loss,” said Rep. Brian Bilbray (R-Calif.), who noted that companies get to keep their profits when times are good but the taxpayer ends up paying for losses during financial turmoil.

Rep. Zach Wamp, a Republican, said voters in his Tennessee district don’t understand why the federal government needs to rescue big New York-based companies such as AIG and Bear Stearns Co., a bank JP Morgan Chase bought earlier this year with the help of a $30 billion government loan.

“I think we should all be incredibly concerned about this knee-jerk reaction from the federal government to bail out AIG,” he said, predicting a lineup of other troubled companies asking: “If you’re going to bail out AIG, what about us?”

Conservative lawmakers and thinkers say they are alarmed by the growing trend of federal intervention. In addition to providing massive loans to prevent the complete collapse of AIG and Bear Stearns, the administration unveiled a bailout plan for the mortgage finance giants Fannie Mae and Freddie Mac earlier this month. Congress also passed a housing bill earlier this year to rescue thousands of Americans facing home foreclosure.

{mospagebreak}Conservatives criticized the legislation as another bailout.

Now Democratic leaders are talking about passing a $25 billion aid package for the domestic auto industry before the end of the year.

“It’s a dangerous trend,” said Walter E. Williams, an economics professor at George Mason University and a proponent of free markets. “When we bail people out, down the road they’ll engage in risky behavior assuming they’ll be bailed out.”

{mosads}Wamp and some of his colleagues point to the rising federal debt as a bigger economic risk than the failure of a major insurance company.

Others questioned the expanding role of the Treasury Department and Federal Reserve.

“I have very serious concerns about this unprecedented federal intervention,” said Rep. Charlie Dent (R-Pa.).

The aggressive intervention of a Republican administration to prevent AIG’s collapse undermines the message of smaller government and fiscal conservatism touted at the GOP convention in St. Paul, Minn., where Republicans renewed their pledge to control federal spending.

“We lost [the American people’s] trust when rather than reform government, both parties made it bigger,” said Sen. John McCain (R-Ariz.) during his speech accepting the GOP nomination.

Some Republicans fear the administration’s action will again expand the federal government and its expected role.

“It’s a hell of a precedent to bail out these companies without regard to down-the-road consequences,” said David Keene, chairman of the American Conservative Union, who also writes a column for The Hill. “The market is supposed to enforce smart decisions by exacting the price of being stupid.”

A few Republicans sounded a more conciliatory tone, acknowledging that they have had little time to study the deal, which lawmakers say does not require congressional approval.

“I’m not going to second guess the Treasury secretary,” said Sen. Orrin Hatch (R-Utah).

J.D. Foster, an economics fellow at the Heritage Foundation, said the federal economic interventions are becoming a trend in Washington that “threatens to get out of hand.”

But he was less critical than other conservatives of the Federal Reserve’s acquisition of AIG. He noted that the government would own AIG and that the company’s management would be “shown the door” and shareholders would see their investments wiped out.

He said that only investors who had insurance contracts with AIG would receive any sort of a bailout, adding that it was important to protect them to “prevent a financial contagion from spreading and washing over to the rest of the economy.”

Jared Allen contributed to this report.