Compared to taxpayers, the American International Group (AIG), didn't have such a bad week. On the receiving end of an $85 billion bailout package, AIG executives now have new fuel to ensure the multinational lending giant can stay afloat in a turbulent market. But the Federal Exchange, funded by regular tax dollars, isn't as lucky. The latest bailout is the third in a series of rescue packages this year, so far totaling more than $200 billion in federal money.
The outlook for financial institutions—both commercial and investment ones—looks bleak, signaling that the problem could be far from over. Could taxpayers expect more federal-sponsored bailouts? How far could the problem extend? NEWSWEEK's Daniel Stone tried to ask Rep. Barney Frank, chairman of the House Financial Services Committee. Excerpts:
NEWSWEEK: This is the third bailout this year. What ' s next?
Rep. Barney Frank: I have no idea.
What kind of consideration goes into these massive funding packages?
With Fannie and Freddie, Congress was asked to give specific authority because of the federal involvement. But as to Bear Stearns and AIG, members of Congress were simply informed that these were decisions made by the Bush administration, specifically, Treasury Secretary Henry Paulson and Federal Reserve Chairman [Ben] Bernanke. I can't tell you what they were thinking.
Is there any thinking that members of Congress should have more of a say in this?
It's not up to us. Now, I have decided myself that this is not a good way to go. But you don't seem to want to accept the fact that neither of those two were Congressional decisions. They were decisions by the Bush administration, using authority that the Federal Reserve has from a statute passed in the '30s to lend money whenever they want to, when they think it's economically necessary, on whatever terms they want.
You think it should be different?
I would advocate an alternative form of intervention. That's what I'm going to be working on. I don't think it's healthy to have this kind of situation, even though I do admire [Fed Chairman Ben] Bernanke. But you're asking me questions to which I have no idea what the answer is.
Do you support this latest bailout?
I am troubled certainly by one aspect of it. They said it was being done in part because they were getting requests from foreign finance ministers in foreign central banks, because AIG operates in those countries. I asked how much they were contributing and I was told none. I'm worried about the impact on the federal budget, because this means we contribute less to the Treasury. But I do know this: the reason we have to make these choices is because of the lack of regulation. On that I believe very strongly.
Not too many banks are still untouched by this. Washington Mutual is shaky. What about Morgan Stanley, Goldman Sachs and the others? Are you concerned about possibly having to bail out any of these others?
It would be very irresponsible for any elected official to comment on specific institutions.
OK, that's fair. In general terms—
The big commercial banks have done very well. I think that's relevant because they're the more regulated ones. It's the more regulated entities like Citicorp and Bank of America, JP Morgan Chase, maybe Wachovia. So this does say that regulation is better than none. But I can't really speculate on the future of any of them.
Are you concerned about a market backlash from all this intervention?
Yes, look, when Paulson said, "Give me the money for Fannie and Freddie and it'll calm the market," it turned out not to. On the longer term, the market is a fairly rational allocation of resources. Short term, it's subject to fits of nervous hysteria. It's very hard to predict how it'll react.
Reasonably, how big can this problem get?
Can I ask you a question?
How many times in the interview are you going to ask me that?
Well, we're talking about taxpayer dollars here and you're the chairman of the House Financial Services Committee. You must have some thoughts on how much further this could go.
You already asked me that twice. You lose me with that question.