The Federal Reserve and its Plan for AIG

(9/20/2008)

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Summary: AIG, a major US insurance corporation, had been suffering from a liquidity crisis after its bond rating was downgraded from AAA. On September 16, 2008, the Federal Reserve Bank's Board of Governors announced that the Federal Reserve Bank of New York had been authorized to create a 24-month credit-liquidity facility from which AIG could draw up to $85 billion. This "bailout" marked the first time in the 2008 financial crisis that a company independent from the government was essentially nationalized and given taxpayer funds. This event started a nation-wide debate as to the Federal Reserve's power and discretion in deciding which companies could fail and which companies could not. This lead to a call the following day from Federal Reserve Bank chair Ben Bernanke to Treasury Secretary Henry Paulson to call on members of Congress, to describe the need for case for a congressionally authorized bailout of the nation's banking system. This call, of course, eventually led to the creation of the Emergency Economic Stabilization Act of 2008.

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