It’s not surprising that Ben Bernanke is getting a second round as chairman of the Federal Reserve. Had President Obama bounced Bernanke after one four-year term, it would have sent an unsettling message just as the economy appears to be turning the corner. And history may show that Bernanke’s aggressive intervention in the economy over the last 18 months has been much more prudent than the hands-off approach his detractors would have preferred.
But Bernanke has been a key player in a gargantuan government-aid regime that now totals nearly $10 trillion in money lent, spent, or pledged to aid the economy. We know very little about where that money has gone, and when answers come they tend to be unsatisfying. Bernanke’s confirmation hearing before the Senate Banking Committee this fall will be an excellent chance to get some answers. Here are six of the top questions on my list:
When will taxpayers get their money back from AIG? So far the government has spent $85 billion on this bottomless bailout, in exchange getting a 79.9 percent ownership stake in the wrecked insurance company. The Fed has bought an addition $47 billion worth of troubled AIG securities, which it hopes to sell for a profit at some point in the future. AIG has probably been the biggest single problem in the whole financial meltdown, and to the Fed’s credit, it had no good options when it stepped in to rescue AIG last September. The whole mess is Exhibit A in the case for a new regulatory structure that provides an effective way to deal with huge non-bank companies that could singlehandedly trash the economy if they fail, which is AIG’s claim to fame.
But now, taxpayers deserve to know if they’re ever going to get back their investment in AIG. The answer is probably no, at least not all of it. Bernanke should explain why, and then tell us what we got for our $85 billion, or however much we end up burning on AIG. That money needs to be accounted for and now’s the time to start doing it. (Other bailouts that will probably go unredeemed include Chrysler, General Motors and GMAC, but those are mostly Treasury Secretary Tim Geithner’s responsibility, not Bernanke’s.)
Why did Goldman Sachs get AIG bailout money? Six months after the beginning of the AIG bailout, we learned that $12.9 billion worth of AIG bailout money actually went to Goldman Sachs, which had multiple deals with AIG that the government basically redeemed at 100 cents on the dollar. Three European banks got more than $30 billion in AIG bailout money, with other AIG trading partners getting lesser amounts. There may have been a sound reason for passing through so much money to AIG counterparties. So what was it? And why didn’t those trading partners even take a haircut on their deals with AIG, when the government itself will probably lose a bundle? This deal is especially fishy given that former Treasury Secretary Henry Paulson came straight to Washington from Goldman, where he was CEO. Bernanke has the standing to put conspiracy theories to rest—if there’s a convincing explanation for the Goldman payouts that for some reason we haven’t heard so far.
Why is Citigroup still in business? By most accounts, this rogue bank made so many bad bets with its money—and other people’s—that it would have gone out of business five times over without massive government aid. The feds have given Citi $45 billion, plus guaranteed the better part of $301 billion in dodgy assets, with no payback plan in sight. Smaller banks in such bad shape have been summarily taken over by the FDIC and sold off, but Citi is apparently a special case. Why? Just because it’s huge? Last fall, when the financial system was at the edge of a cliff, it may have made sense to treat the biggest banks with kid gloves. But the government gave Citi more money in January to keep it solvent, and now it effectively owns one-third of the bank. So why not devise a plan to break up Citi in an orderly way, sell it off and send the message that size doesn’t inoculate a bank against repercussions for horrendous decisions?
Why Bear Stearns and not Lehman Brothers? Wall Streeters love to gripe about how the Fed and the Treasury screwed up by failing to rescue Lehman Brothers last September, which triggered a meltdown that quickly spread throughout the financial system. There are some plausible reasons for why the feds didn’t broker a deal to save Lehman; for instance, there was no buyer for the firm as there was in the case of Bear Stearns six months earlier. But the real question may be why did the government rescue Bear Stearns in the first place? That bailout, in March 2008, created a very clear expectation that any other financial firm that stumbled would get a similar bailout, which was clearly a factor in some decisions Lehman made before realizing the feds were going to let the firm fail. With 18 months of hindsight it would be nice to know whether Bernanke would do the whole thing again the same way.
What was your biggest mistake over the last 18 months? The whole bailout regime has been a wild affair, with no playbook, some risky audibles and a few fumbles. Bernanke deserves credit for helping calm panicky markets and forestalling a depression, but there have been some ugly moments, too. It would be nice to hear what he thinks his biggest flub has been. Extra points for candor (which, in the hellfire environment of political Washington, he probably won’t earn.)
Is the American public smart enough to understand what’s been going on? Obviously Bernanke would say yes, but the government has in fact acted like hundreds of taxpayer-funded bailouts are none of our business—even though we’re paying for them. Bailout details have been scarce. In some cases New York State attorney general Andrew Cuomo has forced release of sensitive info—on banker bonuses at AIG and Merrill Lynch—that the feds wouldn’t divulge. And the government doesn’t like to talk about when it’s going to get that bailout money back. If Americans are smart enough to understand the bailouts and what’s behind them, then the government should give us the information straight. And if we’re not smart enough, then we get the bankers we deserve.