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Ben Bernanke On Banks And AIG: Still Too Big To Fail?

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Ben Bernanke On Banks And AIG: Still Too Big To Fail?

  • Last Sunday, Ben Bernanke, economist and former chairman of the U.S. Federal Reserve, was a guest on Wall Street Week.
  • The scholar went into several subjects, including his background, his ascent to politics, the Fed and low interest rates.
  • His comments regarding banks and insurers, and his opinion regarding the “too big to fail” thesis are worthy of special repute.
  • Ben Bernanke served two terms as chairman of the U.S. Federal Reserve, holding the spot between 2006 and 2014. During this period, he oversaw the response to the latest financial crisis, making, at times, very hard decisions. Talking about these types of choices, he assured, “It’s hard for anybody to make hard decisions [...] I try to be empathetic. I think that’s important for policymakers to pay attention to the people behind the numbers.”

    He emphasized, “You have got to remember these are real people, real jobs.”

    Related Link: Larry Summers Explains Why He Is Positive On The U.S. Macroeconomic Situation

    He continued by explaining what he and his colleagues at the Fed tried to do was “the right thing for Main Street.”

    'Too Big To Fail'

    Following that comment, host Gary Kaminsky recalled, “One of the risks then was that these institutions were too big to fail, or were too big and too interconnected.” Kaminsky posed, “Is that still a concern?”

    Bernanke explicated this is, in fact, still a concern. However, he said, “I think we’re making a lot of progress on that. They’ve got a lot bigger equity buffers; so that, if they lose money, they’re losing their own money and their shareholders’ money.”

    He stated, “For a long time, before they get to the point where there’s any concern about the solvency of these firms.

    “If the government knows that they can shut a firm down without creating a broad panic, they’ll be much more inclined to do that, so the ‘too big to fail’ problem” will lose relevance.

    Is AIG Too Big To Fail?

    Kaminsky recalled a recent interview during which legendary investor Carl Icahn assured American International Group Inc (NYSE: AIG) is still too big to fail. Kaminsky added doubt to the conversation, portraying AIG as “not manageable and still possesses a significant risk in the financial system.”

    Related Link: Is There A Difference Between Good Debt And Bad Debt?

    Bernanke then responded, “In the process of repaying the Fed and government the money that AIG borrowed to stay alive, it did sell of a lot of its subsidiaries.” So, now, it’s a business decision: should it be smaller?

    However, the economist pointed out, “One of the encouraging things is that some of these rules that make it more costly to be big have actually encouraged some of the big firms to shrink somewhat.”

    Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.

    Image Credit: "Ben Bernanke sworn in to the Federal Reserve Post" by White House photo by Kimberlee Hewitt - whitehouse.gov, President Attends Swearing-In Ceremony for Federal Reserve Chairman Ben Bernanke. Licensed under Public Domain via Wikimedia Commons.

    Posted-In: Ben Bernanke Carl Icahn Wall Street WeekPolitics Economics Federal Reserve Media General

     

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