AIG accounting scandal could reduce Feldstein’s chances of chairing the Fed.

As recently as a few months ago, Baker Professor of Economics Martin S. Feldstein ’61 was the hands-down favorite to become the nation’s next Federal Reserve chairman when Alan Greenspan retires next year. But in recent months, pundits and online gamblers alike have started putting their money on different candidates as details of a scandal at the American International Group, Inc. (AIG) unfold.

AIG—the world’s largest insurance company by market value—said last week that it would restate financial reports released over the past five years after an internal review found that accounting errors may have led the New York-based company to overstate its net worth by $2.7 billion.

Feldstein currently sits on AIG’s 18-member board of directors, a post he has held since 1988. He is also a member of the board’s finance committee.

According to a recent report in the New York Times, Feldstein—president and CEO of the Cambridge-based National Bureau of Economic Research (NBER)—was one of several AIG directors to receive a donation from the Starr Foundation, a nonprofit organization that is chaired by former AIG chairman and CEO Maurice R. Greenberg. Greenberg was forced out of his position at AIG when revelations of the improper accounting practices first came to light in February.

NBER received more than $2.6 million between 2001 and 2002 from the Starr Foundation, according to a proxy statement filed by AIG last year.

Feldstein declined to comment for this story.

“I think the director really shouldn’t be commenting on things he might know as director,” he said.

But although Feldstein has not been linked to the accounting practices in question, some say his mere association with the company may hurt his chances of securing the Federal Reserve chairmanship.

Thomas Schlesinger, executive director of Financial Markets Center—a nonprofit research group that specializes in the Federal Reserve—said that the Bush administration may be reluctant to choose Feldstein because of the administration’s desire to distance itself from anything that might be seen as corporate scandal.

“If Professor Feldstein were head-and-shoulders the leading candidate [for the Fed chair]...the White House team would be digging into his role at AIG pretty vigorously,” he said, adding that he has no inside knowledge of White House preferences. “I think they’re probably looking into it at some degree right now.”

Schlesinger said the Bush administration officials might also be waiting for the results of state and federal investigations before they decide whether to conduct an independent review.

The AIG internal probe came in response to a separate investigation spearheaded by New York Attorney General Eliot Spitzer and the U.S. Securities and Exchange Commission. Last week, it was revealed that officials are also investigating whether Greenberg attempted to prop up AIG’s stock price in the weeks before his removal.

According to an AIG press release, the company expects to file its restated financial reports by May 31.

—Staff writer Javier C. Hernandez can be reached at jhernand@fas.harvard.edu.