Yet More House Finance Hearing Geithner Liveblog, Part Two

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First liveblog thread here. 

Castle: I want to address what you didn’t address. Collins, stability management council. Unanimous agreement we need to do something. Fed has certain authority now, I worry about conflicts there. I would hope that careful thought is given to being inclusive. To have some of the entities being regulated at table. I don’t want iron fisted hand making all these decisions.

[Can we put labor at the table, Mr. Castle??]

TG: Three different issues. Division of labor. Checks and balances. As is now case under FDIC. Can’t vest authority within one entity. Another set of issues, cooperation across regulator authorities. Much more integration. Not vested in one place. Third, who should be responsible. We have to make sure the people who are responsible are competent to regulate. Not Treasury. In a fire, the fire station needs to understand the neighborhood, don’t want to convene committee. Pragmatic case, authority for crisis management matched with systemic risk.

[Again, why did you send someone–Steven Rattner–who knows nothing about the auto industry to resolve it??]

Grayson: How difficult the decisions we make today. Balance sheet earlier this month. AIG had an exposure to the yield curve of $500B, five times greater than it ever had in equity. Why didn’t anyone stop from accumulating that risk.

TG: AIG was allowed to build up through complex structures huge amounts of risk. No competent authority. No choice but to come in and unwind.

Grayson: Last 10Q. Fannie Mae accumulated over $250B in derivatives.

TG: Not something I could respond to as carefully. Fannie and Freddie, large set of risks they have to hedge. More powerful supervisor. Not infer from looking at one piece of 10K.

Grayson: It’s all exposure, in June over 1.5 trillion. If that contributed to failure, what point should have someone said enough is enough.

TG: You can’t measure risk and exposure by looking at that.

Grayson: Substantive rules to prevent this kind of risk.

TG: Capital capital capital.  Greater cushion. Best solution these things. Not something market’s gonna provide on its own.

Grayson: If AIG subject to margin calls, never have gotten here.

TG: Margin regime, AIG hold more capital in regards to risk. Derivatives, much more conservative.

Grayson: Rules you see being put in place.

TG:  If an entity were to rise to a level, it could pose systemic risk. Brought within framework similar to large regulated institutions. 

Grayson: Someone will say enough is enough.

TG: constrain risks. 

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Did Chuck Todd Ask about Sacrifice because He’s Been Asked to Sacrifice?

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This might explain why Chuck Todd was so hot to call for sacrifice the other night:

NBC News has instituted an across-the-board freeze on raises for its executives and talent, even those with contracts guaranteeing them salary bumps.

A tipster tells us that NBC News—and probably all of NBC Universal, though we’re not sure—is discreetly calling around and asking its on-air and off-air employees to take one for the team and voluntarily delay any contractually obligated salary increases for six months.

Is it possible that a crack journalist like Chuck Todd doesn’t know that Main Street has been facing what amount to be pay cuts for some time? Since about 1972?

It’s all about Chuck Todd, you know. 

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Yet More House Finance Hearing Geithner Liveblog

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If I understand the rules Barney Frank laid down on Tuesday, the members who waited patiently but never got a chance to ask questions on Tuesday (people like Alan Grayson) get to go first.

You can follow along at CSPAN3 or the committee stream.

Here is Geithner’s statement.

Frank: When Geithner and Bernanke here on Tuesday, these members were here when they had to leave: After myself and Sub Chair. (Reads a list of name, including Grayson), they will be the first ones to ask. Systemic risk. Long had ability to wind down banks. Do we need authority to regulate excessive leverage? Innovations that have no value die of their own weight. But innovations that have values, thrive. By definition there are no rules. Securitization a set of innovations on par with earlier set. Greatly magnifies value of money. Problems when there are no rules. 

Bachus: I have been informed AIG trying to force creditors to accept 70% reduction. Foreign bank paid dollar for dollar in bailout. Essential that any new regime not rely on taxpayer funding. What was released yesterday relies on taxpayer funding. This is unacceptable and will perpetrate moral hazard.

Kanjorski:  We need to do this before these entities are close to death. Need to do this to prevent unknown calamities down the road. We must include regulation in the resolution authority. And we must regulate insurance–which is only regulated at state level. Particularly reinsurance. 

Garrett: In light of Chinese and Russian calls for reserve currency, you might want to clarify your remarks [not sure if this was directed to Barney or Tim]. What are roles of current regulators. Federal reserve created to avoid asset bubbles, but they do. Forgive me if I’m still a skeptic if you say systemic regulator will prevent this from ever happening again. We will only be encouraging that it will happen again. 

Geithner: [Note, this is NOT precisely what was in his statement] Here’s the list he just gave:

  • First, we need to establish a single entity with responsibility for systemic stability over the major institutions and critical payment and settlement systems and activities.
  • Second, we need to establish and enforce substantially more conservative capital requirements for institutions that pose potential risk to the stability of the financial system, that are designed to dampen rather than amplify financial cycles.
  • Read more →
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French Execs Shoot Their Gun; Our AIG Employees Accuse US of Extortion

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Remember the passage of the white paper threatening to blow up the global economy if AIGFP’s masters of the universe didn’t get their bonuses? It claimed that if top execs at France’s AIG Bancaire quit, then the French could appoint their own person, which would count as a default.

Departures also have regulatory ramifications. As an example, the resignation of the senior managers of AIGFP’s Banque AIG subsidiary would allow the Commission Bancaire, the French banking regulator, to appoint its own designee to step in and manage Banque AIG. Such an appointment would constitute an event of default under Banque AIG’s derivative and structured transactions, including the regulatory capital CDS book ($234 billion notional amount as of December 31, 2008), and potentially cost tens of billions of dollars in unwind costs. Although it is difficult to assess the likelihood of such regulatory action, at a minimum the disruption associated with significant departures related to a failure to honor contractual obligations would require intensive interactions with regulators and other constituents (rating agencies, counterparties, etc.) to assure them of the ongoing viability of AIGFP as well its commitment to honoring counterparty contracts and claims.

Well, those top execs just shot their gun at the global economy. (h/t masaccio)

Amid the flap over bonuses at American International Group Inc. two of the company’s top managers in Paris have resigned. Their moves have left the giant insurer and officials scrambling to replace them to avoid an unlikely but expensive situation in which billions in AIG trading contracts could default.

Representatives of the Federal Reserve, AIG’s lead U.S. overseer, are talking with French regulators and AIG officials to deal with the consequences of a complicated legal scenario in which the departures of the managers in Banque AIG, a subsidiary of AIG’s Financial Products unit, could trigger defaults in $234 billion of derivative transactions, according to people familiar with the situation and a document AIG provided to the U.S. Treasury.

Meanwhile, other European AIGFP MOTUs are accusing us–their bosses–of the same crimes they’re committing. (h/t Americablog)

AIG Financial Products unit head Gerald Pasciucco told a staff meeting for UK and Paris employees on Monday that he thought a demand for repayments was to a certain extent "blackmail," said a London-based recipient of one of the retention bonuses from the bailed-out insurer.

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Brad Miller Asks More Questions about Goldman Sachs

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Brad Miller (D-NC) asks the complement to the question I asked last night: Where’s the guy who doesn’t know shit about Wall Street to assess these bailouts?

Brad Miller asks, doesn’t Edward Liddy’s past board membership on Goldman Sachs create the appearance of conflict of interest–not to mention someone without the sufficient distance to approach this problem fairly?

Geithner doesn’t seem too troubled about any potential conflict of interest.  

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Brad Sherman Predicts This Will Work Out Badly

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Brad Sherman (D-CA) predicts this is not going to work out well for the taxpayer. First, he predicts we’re going to fail to do anything to reel in Wall Street:

What I fear here is that we are doing a kabuki theater in three acts:

The first act, Washington tells the American people, "we understand your anger at Wall Street."

In the second act, we nitpick to death any proposal that actually adversely affects Wall Street.

And then in the third act, we bestow another trillion dollars on Wall Street on extremely favorable terms.  

He then asks (paraphrase), Will you publish a list of all the TARP recipients and how many of the executives earned over a million in 2008 and 2009. Geithner equivocates, promising only he’ll think about it.

He then asks Geithner when he’s going to get around to writing regulations on executive compensation (reminding him that Neel Kashkari didn’t think $3 million or $30 million wouldn’t be inappropriate salary). 

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Joe Baca: When Was It Broken?

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Joe Baca (D-CA) asked Ben Bernanke a very simple question in today’s House Financial Services hearing on AIG: When was AIG broken? When did it get so screwed up that we would have to bail it out.

Bernanke, however, didn’t give Baca a clear answer. He did say this:

The Office of Thrift Supervision is a small agency that specializes in addressing the problems of thrifts. It was, in this case, involved only because AIG owned a small thrift. It’s main concern is the protection of the thrift. It’s true, as [Polakoff] said, that he looked at some of these elements in the AIGFP division. But I do think that, given the size of the company and the risks being taken, a larger, more effective, stronger, better funded regulatory effort would have been needed in order to identify these problems.

What Bernanke didn’t want to say was:

1999. When Congress dismantled the regulation on this kind of gambling.

Matt Taibbi explained it in more depth. First, he talked about Glass-Steagall (passed killed with Gramm-Leach in 1999 [oops, gotta pay attention when I try to clarify]), that made it possible for insurance companies to dress up as trading firms. Then, he explained that Gramm pushed through the Commodity Futures Modernization Act (in 2000), which made it impossible to regulate CDS.

The blanket exemption meant that Joe Cassano could now sell as many CDS contracts as he wanted, building up as huge a position as he wanted, without anyone in government saying a word. "You have to remember, investment banks aren’t in the business of making huge directional bets," says the government source involved in the AIG bailout. When investment banks write CDS deals, they hedge them. But insurance companies don’t have to hedge. And that’s what AIG did. "They just bet massively long on the housing market," says the source. "Billions and billions."

Then, another bit of 1999 deregulation made it easy for huge companies like AIG to select to be regulated by the undermanned Office of Thrift Supervision (the one that Bernanke talks about above). 

In the biggest joke of all, Cassano’s wheeling and dealing was regulated by the Office of Thrift Supervision, an agency that would prove to be defiantly uninterested in keeping watch over his operations. How a behemoth like AIG came to be regulated by the little-known and relatively small OTS is yet another triumph of the deregulatory instinct. Under another law passed in 1999, certain kinds of holding companies could choose the OTS as their regulator, provided they owned one or more thrifts (better known as savings-and-loans). Because the OTS was viewed as more compliant than the Fed or the Securities and Exchange Commission, companies rushed to reclassify themselves as thrifts. Read more →

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Michael Capuano: Why Are We Using the FDIC in the Bailout? And Why Do We Trust Ratings Agencies?

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Michael Capuano (D-MA) did the best job grilling Geithner and Bernanke about Geithner’s new bailout plan today. He challenged Geither’s claim that this leverages private investment at a 6 to 1 ratio, arguing that with the FDIC funding, it’s actually 13 to 1.

He then asks how much toxic assets are out there, noting that there are more than a trillion dollars of toxic assets out there. 

In addition he questions why we should be reassured that these are AAA assets, since the rating agencies have been so wrong about these assets so far. 

Are they going to fund these things by floating collateralized debt obligations? Geithner says no. Then Capuano reads from the Treasury website using precisely that language. Geithner says he doesn’t consider that a collateralized debt obligation. He gets interrupted before he finishes his question about the losses that FDIC might incur.

Let’s hope someone follows up on Capuano’s question when Geither returns for another round on Thursday. 

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Manzulllo: Why Do Americans Who Lost Their Retirement Have to Pay AIG?

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Congressman Donald Manzullo (R-IL) read this line in Tim Geithner’s opening statement to the House Financial Services Committee today.

AIG directly guarantees over $30 billion of 401(k) and pension plan investments and is a leading provider of retirement services for teachers and educational institutions.

And this line in Ben Bernanke’s opening statement.

Workers whose 401(k) plans had purchased $40 billion of insurance from AIG against the risk that their stable value funds would decline in value would have seen that insurance disappear.

Manzullo asked why it is that the Americans who have lost up to half their own 401(k)s or IRAs because of the decline in stock markets are paying to make sure the 401(k) and pension holders insured by AIG don’t lose any value in their retirement funds.

I understand the point Bernanke tried to offer in response. This is just a loan, it probably will be repaid, these aren’t the same things.

But the exchange was another example of the complete tin ear about how this looks to Americans who are struggling. And Bernanke’s refusal to answer "yes" or "no" simply made it worse.

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Geithner: There Is No Plan B

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Gresham Barrett (R-SC) asked Tim Geithner "the $64 trillion question"–basically, what is Plan B?

Geithner’s response? Don’t worry. It’ll work. 

That wasn’t acceptable when President Bush had no Plan B in Iraq, and it’s not acceptable here.

In his response to Bill Posey, Bernanke did better. But the war images don’t give me a lot of confidence. 

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