Today, the House Committee on Oversight and Government Reform held a hearing entitled “The Collapse and Federal Rescue of AIG and What it Means for the U.S. Economy.” This was the first of a planned series of hearings that the Committee will conduct on AIG, with future hearings tentatively scheduled for later in April and May. Edward M. Liddy, the current CEO of AIG, is expected to testify before the Committee later this month. Today’s testimony came from Maurice R. Greenberg, AIG’s former Chairman and CEO.
In his opening statement, Chairman Edolphus Towns (D-NY) indicated that the Committee chose to focus on AIG because “it is the largest single recipient of federal bailout money” and because “AIG was at the center of the whirlwind as the financial services sector began to crumble.” The Chairman noted that “the American people deserve clear answers to how and why this failure occurred, who was responsible and who benefitted, why the existing regulatory system failed, and what steps need to be taken going forward.” The Chairman hoped “Mr. Greenberg (would) be able to shed some light” on the failure and urged his House colleagues “not too move too quickly … without first fully understanding what caused” AIG’s failure.
Mr. Greenberg pointed to two major causes for the collapse of AIG. First, AIG continued to write credit default swaps even after it lost its AAA credit rating, which introduced the risk of having to post billions of dollars in collateral. Second, AIG mismanaged its “securities-lending operation” by putting “tens of billions of dollars of cash collateral from its securities-lending program into securities with residential mortgage exposure, and stuck with that strategy even as the housing bubble collapsed.”
Mr. Greenberg also addressed the government’s plan to liquidate AIG. He noted that the government’s intention to liquidate AIG “is impossible in the present economic climate” because “fire-sale prices will bring taxpayers … only pennies on the dollar,” and he urged Congress to “abandon the liquidation approach.”
Mr. Greenberg then discussed the government’s payments to AIG’s credit default swap counterparties. He found the payments “puzzling” because “some of the largest CDS counterparties said their exposure to AIG was hedged and they would not have incurred material losses if cash payments had not been met.” Mr. Greenberg noted that “it would have been more beneficial for the American taxpayer if the federal government had walled off … the unit primarily responsible for the CDS obligations, and provided guarantees to … counterparties.”
Finally, Mr. Greenberg proposed a new plan for AIG that emphasizes “government guarantees and long-term government-funded debt, and encourages third party capital rather than relying on government ownership.” Key components of Mr. Greenberg’s plan include: replacing tax-payer funded indebtedness with guarantees; extending the maturity of existing indebtedness; reducing taxes on remaining indebtedness; reducing government ownership to 15% of common equity; stopping core asset sales; and installing a new board and management team.
Overall, Mr. Greenberg stated that “AIG’s business model did not fail – its management did,” while steadfastly declining every invitation to accept any responsibility for his role in creating and encouraging the growth of AIG’s Financial Products division.
Separately, today AIG announced the closing of two asset sale transactions: the $263 million sale of AIG Life of Canada to BMO Financial Group and the $739 million sale of Hartford Steam Boiler to Munich Re Group.