U.S. Federal Reserve chairman Ben Bernanke tends to speak plainly and frankly in public, in sharp contrast to his notoriously opaque predecessor, Alan Greenspan.
But what he says makes people wonder what it is he isn't telling them - and whether the government knows what it's doing. And it makes them even more nervous about the prospects of a return to financial stability and the economic recovery that depends on it.
Such was the case yesterday when Mr. Bernanke, appearing before a Senate panel, railed against American International Group Inc., the floundering insurance giant that has sucked in billions of dollars in U.S. federal assistance and may need billions more to stay afloat. "If there is a single episode in this entire 18 months that has made me more angry, I can't think of one, other than AIG," Mr. Bernanke said in response to a question about the latest government bailout Monday after the company announced a whopping fourth-quarter loss of $61.7-billion (U.S.), mainly because of writedowns.
"AIG exploited a huge gap in the regulatory system, there was no oversight of the financial products division," Mr. Bernanke said. "This was a hedge fund basically that was attached to a large and stable insurance company."
The latest infusion of $30-billion in taxpayer money brings the total government commitment of credit, equity and other relief for AIG to about $180-billion since last September. In exchange, Washington owns close to 80 per cent of the company.
"It's a terrible situation, but we're not doing this to bail out AIG or their shareholders," Mr. Bernanke assured the Senate budget committee. "We're doing this to protect our financial system and to avoid a much more severe crisis in our global economy."
The problem, as explained by Mr. Bernanke, is that AIG is so intertwined with other global institutions, through the complex chain of credit default swaps and other derivatives, that its collapse could be catastrophic. "If Rod Serling [creator of sci-fi series The Twilight Zone] were writing financial columns today, this would be it," said Robert Brusca, head of New York-based Fact and Opinion Economics.
The Federal Reserve is playing a game of poker knowing a couple of cards the public can't see, Mr. Brusca suggested. "It knows more about what positions AIG has and about the counterparties."
But AIG is only one - albeit the largest - of several ticking time bombs in the global financial sector, analysts say. The list includes such troubled banks as Citigroup, Royal Bank of Scotland and a couple of other European institutions that have yet to reveal the full extent of their damage.
"There's no doubt that there's a generalized problem among the world's banks and that it is getting deeper, rather than shallower. And the recession is complicating it," said Carl Weinberg, chief economist with High Frequency Economics in Valhalla, N.Y.
This threatens to extend the credit crunch that is wreaking havoc on the economy.
"What it does is generate permanent battle damage in an economy," Mr. Weinberg said. "It takes companies out for good, rather than a business cycle slowdown where things just get tough and companies can hunker down. This is an eradication kind of event."
Mr. Bernanke sounded his own pessimistic note about the U.S. economy, warning lawmakers that "without a reasonable degree of financial stability, a sustainable recovery will not occur."
The stock market reacted with typical jitters to these latest negative comments - which are becoming a trademark of the Obama administration. "The panic has set in among investors, and they are marking down equity prices more than would be consistent with the economic outlook," said Mark Zandi, chief economist with Moody's Economy.com. "That won't change until it becomes clear that the policy efforts are having some benefit and that the global economy is stabilizing."