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Despite Bailout, Budget Strains Worsen for Fannie, AIG

Ailing financial giants Fannie Mae and American International Group will need additional government help, despite rescue measures extended by the federal recovery package. Two financial experts examine the prudence of the bailouts and their shortcomings.

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    Now the big questions concerning bailouts. Just weeks after the government agreed to provide more than $200 billion to insurance giant AIG and mortgage giant Fannie Mae, both companies are seeking more money.

    Yesterday, the government announced that it would make even more money available to AIG and under more favorable terms.

    Separately, Fannie Mae warned that it, too, may need more cash.

    But what does all this say about the wisdom of these bailouts? We get two views. Joseph Stiglitz is professor of economics at Columbia University. He was chairman of President Clinton's Council of Economic Advisers. He shared the 2001 Nobel Prize in Economics.

    And Peter Wallison was general counsel of the Treasury Department in the Reagan administration. He's now a fellow at the American Enterprise Institute.

    Thank you both for being with us. Well, it looked like a lot of money at the time. There was a big fuss made over all this. But what's happened, Joseph Stiglitz?

  • JOSEPH STIGLITZ, Columbia University:

    Well, the hole in these institutions was much larger than the Treasury admitted at the time. I think, actually, a lot of people in the financial markets understood that we were just putting on a down payment, that the Treasury didn't want to admit how deep the hole was either to itself or to the American people.

    And what we are seeing now is the fuller price tag. We still don't know what the full price tag will be.


    And, Peter Wallison, is that it, that we just didn't know how deep the hole was?

    PETER WALLISON, former general counsel, Treasury Department: I don't think that it was that the Treasury Department knew and didn't tell. I think nobody really knows the size of these holes because they depend very much on the value of mortgages, the value of homes.

    And as mortgages and homes decline in value, the losses become more evident. Fannie Mae and Freddie Mac are going to have enormous losses. I think it's a different situation with AIG, and their losses will be contained, and they will eventually come out of it, but Fannie and Freddie are going to suffer tremendously.