Today, the House Financial Services Committee held a hearing entitled "Oversight of the Federal Government’s Intervention at American International Group." The hearing was held specifically to provide Treasury Secretary Geithner and Federal Reserve Chairman Bernanke an opportunity to "[e]xplain directly and publicly the actions they have taken to rescue AIG from collapse and monitor the company’s performance since then," given they were both unavailable to testify during the House Committee hearing held last Friday. Testifying before the Committee were the following witnesses:
Timothy F. Geithner, Secretary, U.S. Department of the Treasury
Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System
William C. Dudley, President and Chief Executive Officer, Federal Reserve Bank of New York (FRBNY)
During opening marks, Chairman Barney Frank (D-MA) stressed the necessity to avoid the "all or nothing" approach the federal government has taken recently for such firms as AIG (excessive intervention) and Lehman Brothers (allowing bankruptcy). Rather, Congress needs to "give someone authority" to do for nonbanks such as AIG and Lehman Brothers, what the Federal Deposit Insurance Corp. (FDIC) and Federal Reserve did to partially salvage insured depositories such as Wachovia and IndyMac in order to avoid the choice of "all or nothing." Both Chairman Bernanke and Secretary Geithner said such a program could be modeled on the way the FDIC takes over and deals with the assets and liabilities of U.S. banks. While Mr. Bernanke suggested the FDIC could be the logical agency to wield that authority, Mr. Geithner believes such authority should rest with the Treasury.
Overall, the witnesses stressed the need to deal with increasingly complex and systemically important institutions. Secretary Geithner "welcomed the attention" Congress is focusing on AIG given the vast amount of taxpayer investment and "shares the anger and frustration of the American people," however he stated that the judgment to rescue AIG was a necessity given the likely potential for "large and unpredictable global losses with systemic consequences" if AIG were to fail. With respect to the recent AIG retention payments, Secretary Geithner stated that on March 10, he did receive a "full briefing on the details of AIG Financial Products (AIGFP) pending retention payments" and requested that AIG CEO Edward Liddy renegotiate these payments and demanded the reduction of future payments. Going forward, Treasury will "impose on AIG a contractual commitment" to pay the Treasury the amount of the retention payments just paid, and "will deduct from the $30 billion in recently committed capital assistance, an amount equal to those payments." Separately, in response to questioning surrounding the billions of counterparty payments made to the likes of Goldman Sachs, Bank of America and several European banks, Secretary Geithner stated that there was "no legal mechanism in place" to selectively impose a haircut on those payments.
Chairman Bernanke focused his testimony on the reasons why the Federal Reserve determined it was necessary to lend to AIG, rather than let them fail. Specifically, he stated that given the combined exposure of state and local government entities, banks and mutual funds, and the uncertainty to the many AIG policyholders, "AIG’s failure under the conditions then prevailing would have posed unacceptable risks for the global financial system and for our economy." Failure to lend to AIG may have resulted in a "1930s-style global financial and economic meltdown, with catastrophic implications for production, income, and jobs." Chairman Bernanke also stated that upon becoming aware of the AIGFP retention payments, he was informed that they could not be stopped and that filing suit to prevent them may have led to "substantial punitive damages" in Connecticut. As a result, he has directed staff to work with the Treasury and the Obama Administration in their review of whether the AIGFP bonus and retention payments can be reclaimed. Finally, Mr. Dudley stated that the FRBNY "stands behind" its judgment to lend to AIG, given "AIG’s unparalleled global footprint," "the multiplicity of different types of financial services entities within its structure," and the factors that proved "unmanageable in the Lehman insolvency threatened to be much more severe in AIG’s case." As for the AIGFP retention bonuses, the FRBNY believes, from a risk-perspective, there was not a reason to disagree with AIG CEO Ed Liddy’s judgment to prevent payment of the retention bonuses given the likely negative effects of disruption at AIGFP, the legal advice concerning the contracts was valid, and the negative consequences to AIG’s business that could result from the public abrogation of contracts.