Today, the House Oversight and Government Reform Committee held a hearing entitled “The Federal Bailout of AIG"” to examine the collapse and federal rescue of American International Group, Inc. (AIG), with particular focus on payments made to AIG credit default swap counterparties. The hearing comes on the heels of a subpoena issued two weeks ago by Committee Chairman Edolphus Towns (D-NY) to the Federal Reserve Bank of New York (FRBNY) for documents related to payments made to AIG counterparties, and the hearing is a direct response to the release earlier this month by Committee Ranking Member Darrell Issa (R-CA) of copies of several email exchanges between FRBNY and AIG representatives discussing, among other things, what disclosures were required in AIG's SEC filings disclosure regarding AIG's payments for credit-default swaps to major bank counterparties.
Testifying before the Committee were the following witnesses:
- Timothy F. Geithner, Secretary, U.S. Treasury Department
- Henry Paulson, Former Secretary, U.S. Treasury Department
- Neil Barofsky, Special Inspector General, Troubled Asset Relief Program (SIGTARP)
- Thomas C. Baxter, Executive Vice President and General Counsel, Federal Reserve Bank of New York (FRBNY)
- Elias Habayeb, Former Senior Vice President and Chief Financial Officer – Financial Services Division, American International Group, Inc.
- Stephen Friedman, Former Chairman, Federal Reserve Bank of New York
In Chairman Towns' opening remarks, he immediately called into question the "credibility of the Federal Reserve" in its handling of AIG's payments to its credit default swap counterparties, noting in particular that because of the Federal Reserve's "secrecy," taxpayers continue to be uninformed about "why or how the decision to rescue AIG was made, or who made the decision to offer AIG’s trading partners 100 cents on the dollar." Eager to seek answers from the witnesses before the Committee, Chairman Towns noted that the "lack of transparency we have seen in the double bailout of AIG leads to distrust, which leads to anger." Echoing Chairman Towns, Ranking Member Darrell Issa called the AIG bailout a "backdoor bailout" which may ultimately cause the American people to "never be repaid." Mr. Barofsky stated that since SIGTARP's audit of AIG's counterparty transactions, undertaken this past November, several "issues have come to light that call into question whether the government has been and is being as transparent as possible with the American people," particularly, the fact that "documents have come to light that were not provided to the SIGTARP audit team" during the course of its audit.
Secretary Geithner testified that he "welcomed the Committee's attention to the issues" surrounding the AIG rescue, and was adamant that the steps the government took to rescue AIG were undertaken in what the government "believed to be in the best interests of the American people." Given that the economy "stood at the brink," the government "did not have the luxury of time" to act, and the Federal Reserve was the only "fire station in town." In response to questioning about Secretary Geithner's role in the AIG bailout while President of the FRBNY, he acknowledged the decision and his particular knowledge to pay counterparties 100 cents on the dollar, but stated emphatically that he played "no role in making decisions regarding what to disclose about the specific financial terms of payments to AIG's counterparties." Following his November 24, 2008 nomination to be Secretary of the Treasury, he "withdrew from involvement in monetary policy decision, policies involving individual institutions, and day-to-day management of FRBNY." Rep. Dan Burton (R-IN) questioned whether Secretary Geithner truly fully withdrew himself from decisions about disclosure, stating that “It stretches credulity for us to believe that you had no role in this."
Rep. Elijah Cummings (D-MD) expressed his concern over whether "a lot is being done for Wall Street," rather than "Main Street", and questioned why the AIG bailout was so crucial. In response, Secretary Geithner reiterated that at the time, there was a "threat to the system as a whole" including the distinct possibility of overall economic collapse, and that it if AIG were to have failed, the financial crisis would have worsened to a point of being "out of control." Secretary Geithner also briefly addressed the importance of financial regulatory reform, particularly his support of the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173) that was recently passed by the House, to avoid future "taxpayer exposure to losses" and remove the ability of institutions to "take risk without constraints."
Mr. Paulson also defended the AIG rescue, asserting that the alternative would be "economic disaster," and lauded the actions taken by the government. Mr. Paulson stated that he was "not involved in any of the decisions made with respect" to payments to AIG's credit default swap counterparties, nor was he "involved in any of the decisions about AIG’s public disclosure" of such payments. Chairman Towns asked Mr. Paulson why he did not use his "influence" to request AIG counterparties to take a haircut on the counterparty payments. Mr. Paulson remarked that he had "great confidence" in the abilities of the Federal Reserve to handle any restructuring with AIG. Mr. Friedman also testified that although he "receive[d] summary briefings from senior [Federal] Reserve Bank officials" regarding the rescues of AIG, he was "not involved in the decision to repay the AIG counterparties at par, or the decision not to publicly disclose those counterparties’ names."
Mr. Baxter discussed the "considerable uncertainty" if AIG were to have filed for bankruptcy, particularly the potential of a "run on financial institutions," massive losses to global commercial banks and investment banks from loans and lines of credit extended to AIG and on derivatives contracts and other transactions with AIG Financial Products, and the possible seizure of AIG’s insurance subsidiaries, "leaving U.S. policyholders facing considerable uncertainty about their rights and claims." Addressing the assertions that the FRBNY "pressured" AIG into “covering up” parts of the transactions in its securities disclosures, Mr. Baxter briefly described the FRBNY's suggestions regarding such disclosures and noted that many suggestions made by the FRBNY were provided to AIG to so its filings would be "accurate" not as a "cover up" and to further "ensure that there would be no incorrect expectation created in the public markets that additional Federal Reserve assistance to AIG would be forthcoming."
Mr. Habayeb briefly discussed the creation of Maiden Lane III LLC (Maiden Lane), the financing vehicle created by the FRBNY to facilitate the unwinding of a significant portion of AIG Financial Products' credit default swaps, as well as his role in AIG's attempts to reduce AIG Financial Products' risk exposure. Mr. Habayeb noted that the creation of Maiden Lane was "crucial to AIG in order to materially reduce the risk of substantial collateral postings to counterparties that AIG Financial Products was required to make," and to "reduce the erosion to AIG's capital."