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 →

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. 

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.

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. 

Maxine Waters: Is Goldman Sachs Going to Manage Our Toxic Waste?

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Maxine Waters got into one key area of distrust on the bailouts: the ubiquity of Goldman Sachs in bailout plans.

Tim Geithner sure didn’t seem all that interested in Waters’ questions on the bailout. 

Geithner and Bernanke Visit Financial Services Liveblog (Thread the Third)

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Hearing is on CSPAN3 and the committee thread. In addition to Geithner and Bernanke, the head of the NY Fed, William Dudley, is also here.

For my liveblog on the statements, go here (it’s mostly an excerpt of their statements).

For the first set of member questions, go here. 

Last two rounds with Bernanke.

Baca: Foreign payouts?

BB: Many issues and concerns boil down to lack of resolution regime. Europeans have protected financial institutions. Need to work collaboratively. 

Baca: What can be done now.

BB: Regulatory system not adequate. We didn’t see it. Resolution authorities. WRT getting money back. Again, put a lot of money into AIG. Good collateral. 

Baca: Why not prepared. Through many parts of regulatory system, not prepared.

[Let me help you, Helicopter Ben: G-L-A-S-S-S-T-E-A-G-A-L-L]

Baca: When was it broken?

BB: OTS small agency specializes in thrifts.

[No mention that AIG was given option of whom to be regulated by]

BB: Larger better funded needed.

Baca: When was it broken?

BB: Many different aspects just proved in adequate. 

Posey: Everybody is upset with a crisis of the day. Son of TARP, Grandson of TARP. Most businesses would approach this with a grand plan. Flow chart. where we want to go, how we measure, with contingencies. I think everybody would be so much more comfortable with a plan, and a timeline. We’ve got no roadmap for financial future of the country.

BB: I do think there’s a plan. Treasury has 5-point plan. That covers all the major elements to get banking system going again. Avoid AIG need to undertake financial reform program. Fed has proposals, I talked about last week. I think there is a plan. A lot of battles are chaotic until smoke clears. We can see the terrain. 

Posey: I appreciate that. Hope that most battles are won with good plans. 5-point plan is a hail mary, and we hope to make a touchdown. If the receiver drops the ball, what are we going to do with that first plan. That’s what I haven’t seen unfold. We didn’t measure stuff properly. 

Geithner and Bernanke Visit Financial Services Liveblog (Member Questions)

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Hearing is on CSPAN3 and the committee thread. In addition to Geithner and Bernanke, the head of the NY Fed, William Dudley, is also here.

For my liveblog on the statements, go here (it’s mostly an excerpt of their statements).

Frank: Begin with Bernanke. First an announcement. We have a lot of members here, important hearing. Wish we didn’t have 5 minute rule, not so many members, wish I could lose weight without dieting. At conclusion of 5 minutes, whoever is speaking will have to finish sentence. Leave time for questions. Not fair to more junior members. I will also gain weight. 

Frank: Made last September. When you made decision to intervene, was it in consultation with Paulson?

Bernanke: Yes.

Frank: I remember question of why no foreign participation. Necessity to retain foreign confidence. People who thought we could blow that off got a little start from the PM of China. On the question of compensation, Dudley, I assume you were talking about reforms that go beyond TARP recipients?

Dudley: We have looked at compensation governance at AIG.

Frank: I’m saying are you talking about outside of context of those who receive funding?

Dudley: AIG.

Frank: Bernanke?

Bernanke: Compensation that links reward appropriately, makes sure we don’t get short term for long term outcomes. 

Frank: We tried to limit exec compensation, became a partisan issue. Considerable view on Republican side that we should not intervene in terms of compensation. I was please to hear what you said. Compensation that incentivizes top decision makers to take risks unduly is something we’ll return to. Last time that came up partisan debate. Resolution authority, Bernanke, if resolution authority had existed, would AIG have been handled differently.

Bernanke: Receivership or conservatorship. Bonuses could have been adjusted. Haircuts against counterparties. Very similar to way FDIC would handle IndyMac.

Bachus: Geithner, you were in the meetings in September?

Geithner: Yes, I was President of NY Fed.

Bachus: Money to counterparties on October 8.

Geithner: purpose of doing so is to protect the economy.  Throughout that period of time, wanted to make sure AIG to meet its commitments.

Bachus: Within about 2 weeks payments made to counterparties.

Geithner: Within hours, technically, within minutes.

Bachus: Over $50 billion of these payments. These parties took a risk, didn’t they?

Geithner: Any insurance contract posed risks.

Bachus: CDS, I guess you can call it insurance. AIG defaulted. 

Geithner: Any of the contracts AIG had on insurance.

Bachus: They were paid 100%.

Geithner: Purpose of intervention, AIG was able to meet obligations.

Read more →

Geithner and Bernanke Visit Financial Services Liveblog

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A few days ago, this hearing might have focused on why we need to bribe the banksters to clean up their mess. Now, it will undoubtedly focus on why we’re socializing risk some more. We’ll also have William Dudley, the new head of the NY Fed.

The hearing is on CSPAN1 and the committee stream. We’ll have a long series of member statements before we get to Tim and Ben. 

From Geithner’s statment, he’s still pushing regulation of "too big to fail" rather than avoiding "too big to fail."

We must ensure that our country never faces this situation again. To achieve this goal, the Administration and Congress have to work together to enact comprehensive regulatory reform and eliminate gaps in supervision. All institutions and markets that could post systemic risk will be subject to strong oversight, including appropriate constraints on risk-taking. Regulators must apply standards, not just to protect the soundness of indivdiual institutions, but to protect the stability of the system as a whole. 

And here’s Timmeh playing dumb on bonuses.

 In November, as part of the government’s infusion of capital, Treasury imposed the strictest level of executive compensation standards required under the Emergency Stabilization Act. When we were forced to take additional action in March, we required AIG to also apply the Treasury rules that will be promulgated based on the executive compensation provisions in the American Reinvestment and Recovery Act.

See, AIG has given out bonuses to 4,500 people since we bailed them out in September.  And Treasury knew about the AIGFP bonuses (to be paid in March) when they were negotiating the most recent $30 billion. But for some reason Timmeh doesn’t want you to know about it.

Barney Frank: [Reminding the context of AIG, the Lehman collapse and the no involvement of Congress] Two examples of how not to proceed. Lehman, not help for creditors. The other one, AIG, help for all of the creditors. Contrast with Wachovia, IndyMac, WaMu. Those of us who will mourn Countrywide are a small number. Regulators that contained the damage. Neither Lehman total collapse on economy or excessive intervention. Read more →

Where’s the Guy Who Doesn’t Know $hit about Wall Street?

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Steven Rattner doesn’t know shit about cars.

Or at least he didn’t a month and a half ago. And then, President Obama decided he was the single best person in the country to lead the auto task force–to assess the state of the auto industry, figure out whether letting one or both of the failing companies go under, and if not, how to bring them out of their doldrums.

Frankly, I’m unconvinced Rattner was the guy to assess and guide the auto restructuring–mostly though because he seems to have gotten picked because he’s a schmoozy insider with a great talent for self-promotion. But I do appreciate this qualification of Rattner’s:

"What I bring to this is the advantage of no preconceived notions. I don’t come with an embedded view," Rattner said in an interview, calling the job "the most complex challenge I’ve ever had to deal with."

And here’s another "qualification," pitched by his buddy Steven Weisman:

"He may not have had a particular history of interest in the auto industry, but he would bring the ability to ask basic questions and try to get basic answers and drive toward the agreement on a solution."

Sean McAlinden, who does know the auto industry, reports that at least Rattner has been learning quickly.

Now like I said, I’m not convinced having someone who is totally ignorant about an industry is the best person to come in and try to rescue it. But at the very least, having someone as ignorant as Rattner go through the process of learning about the auto industry may help Obama to rethink his significant preconceived notions about why the auto industry is in trouble and what to do about it. 

I realized today–as I was doing a radio interview about AIG bonuses with Nancy Skinner, also in MI–how dramtically different Obama’s approach to assessing and resolving the finance industry (the folks who, after all, caused many of the more urgent woes of the car companies). 

Obama’s first instinct in assessing the auto industry was to bring in someone who was completely ignorant of the industry, to ask questions. Read more →

The Fed and Bonuses

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The WSJ has a detailed chronology of when the Fed started looking at AIG’s bonuses. I think it, at times, confuses the AIGFP bonuses that were negotiated in March 2008 with the bonuses that were negotiated after AIG got bailed out (AIG gave retention bonuses to a group of employees that has expanded from 130 to 4700 since September–which I’ll return to in a later post). And it makes an even larger error, misrepresenting the main reason AIG kept the AIGFP bonuses, which was that they really felt they needed those employees to stick around (the WSJ focuses only on the legal question, which Edward Liddy has made clear was secondary to the perceived need to keep these people around).

But the WSJ story makes one thing clear: the Fed deliberately avoided discussing bonuses in the context of new bailout negotiations.

In late January, news outlets reported that AIG planned a total of $450 million in bonuses to help retain employees winding down the complex trades in the unit at the heart of the company’s collapse. In the weeks that followed, Mr. Liddy and other AIG officials briefed some lawmakers about the retention payments and other aspects of the AIG rescue.

On Feb. 28, as government officials worked on a fourth AIG bailout, the New York Federal Reserve Bank emailed Stephen Albrecht, a Treasury lawyer, laying out the AIG bonus issues and promising further detail, according to two people familiar with the email. Mr. Albrecht did not return a call seeking comment.

It was an intense weekend, as Treasury and Fed officials frantically prepared to close the AIG deal. "When we heard there was this executive compensation thing floating out there, we thought, ‘We’ll deal with this later,’" said one Treasury official.

On March 2, AIG announced both record losses and $30 billion in fresh Treasury aid.

This is appalling not just because the Fed and Treasury put off dealing with the question of bonuses at the same time as they were forcing the UAW to renegotiate its contract as a condition of new aid.

But it also seems to strongly suggest that neither the Fed nor Treasury have ever really questioned AIG’s representation that it needs to keep these finance guys around by bribing them. We learned on Friday that the guy receiving the biggest bonuses–Doug Poling–was the lawyer who crafted the CDS contracts. Don’t you think we ought to determine whether we ought Read more →