Yellen Defends AIG Bailout

By Kate Davidson 

WASHINGTON--Federal Reserve Chairwoman Janet Yellen said Wednesday she "strongly" believes the Fed's unprecedented actions to provide assistance to American International Group Inc. "were proper, legal and effective."

A federal judge ruled this week that the government violated the law when it took a controlling stake in AIG in 2008, imposing "unduly harsh" terms on the firm in comparison to other financial institutions.

"The Federal Reserve strongly believes that its actions with respect to AIG in 2008 were legal, proper and effective, and I believe that they were necessary," Ms. Yellen said.

Ms. Yellen added that the terms "were tough and appropriately so in order to protect taxpayers from the risks those rescue loans presented at the time they were made."

Judge Thomas C. Wheeler accepted the government's arguments that without the Fed's $85 billion loan, the firm would have filed for bankruptcy and shareholders would have been left with nothing.

Ms. Yellen noted that the 2010 Dodd-Frank law no longer permits the Fed to intervene to rescue one particular institution, though it may still administer broad-based emergency lending programs.

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