Geithner and Bernanke Visit Financial Services Liveblog (Thread the Third)
/6 Comments/in Economics /by emptywheelHearing 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)
/111 Comments/in Economics /by emptywheelHearing 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.
Geithner and Bernanke Visit Financial Services Liveblog
/10 Comments/in Economics /by emptywheelA 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 Honorable Timothy F. Geithner, Secretary, U.S. Department of the Treasury
- The Honorable Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System
- Mr. William C. Dudley, President and Chief Executive Officer, Federal Reserve Bank of New York
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?
/39 Comments/in automobiles, Economics /by emptywheelSteven 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
/63 Comments/in Economics /by emptywheelThe 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 →
Liddy’s Lies to Congress: Meet AIG’s $6.4 Million Man
/31 Comments/in Economics /by emptywheelAs I noted this morning, Doug Poling was the guy whom AIG decided last year should get a $6.4 million "retention" bonus for sticking around a year. (He has since turned down the bonus.)
The WSJ has some details on what Poling has done to be worth so much money.
In August 2007, Douglas Poling sat in on a meeting at which Joseph Cassano, then-head of American International Group Inc.’s financial-products unit, berated an in-house auditor for raising questions about the accounting for a joint venture Mr. Poling led.
The auditor, Joseph St. Denis, resigned the next month after his reporting lines were changed to limit his communications with auditors at the parent company, according to an account of AIG’s dealings he detailed in a letter he wrote to Congress last October.
[snip]
A former Wall Street lawyer who joined the AIG unit in the early 1990s, Mr. Poling oversaw legal work on the contracts that sat at the core of the unit’s business — such as customized insurance-like swaps and other derivative contracts that generated a steady stream of fees, according to former colleagues.
[snip]
In May 2007, as AIG’s swaps problems began developing, Mr. Poling expressed confidence about the business approach of AIG’s financial unit toward one of its products, in an investor presentation with Mr. Cassano.
"We are very careful and disciplined and rigorous in the way in which we structure and document these transactions, and are very sensitive to ensuring that we have early termination rights so that if the rules change, we’re able to unwind those transactions and move on to other segments of the business that are more attractive," Mr. Poling said, according to a transcript of the investor presentation.
[snip]
The Poling-led joint venture discussed at the meeting preceding Mr. St. Denis’ resignation was a partnership announced in March 2007 between AIG’s financial-products unit and closely held Tenaska Energy in Omaha, Neb. AIG began unwinding the partnership in January. [my emphasis]
So, our $6.4 million man was one of the people cheering the safety of AIG’s CDS business, and one of the guys in charge of an energy deal that seemed to be based on dicey accounting. (For more on Tenaska, see page 6-7 of this).
Now, when he testified before Congress the other day, Edward Liddy repeatedly assured the Committee that the people who had put together the CDS business were gone. He stated clearly that the people left over were the good guys, people tied to "traditional" derivatives business. For example, here’s Liddy telling Bill Posey that the guys managing the derivatives–who are distinct from the guys who brought the company to its knees–are getting the bonuses.
Posey: We wouldn’t care about the bonuses if it weren’t for the bailout money. Read more →
President Obama Warns Americans about Threat from Financial Terrorists
/76 Comments/in Economics /by emptywheelI first suggested that AIG’s masters of the universe had strapped themselves in semtex-lined vests in this post. I then noted that they had issued further threats on the pages of the WaPo.
Apparently, Obama has noticed the semtex-lined vests, too.
But today, President Obama took that rhetoric in a different direction. He actually upped the ante explaining that AIG is like a suicide bomber.
“We had to step in, it was the right thing to do, even though it is infuriating,” Obama said, explaining why the government needed to bail out the troubled banks.
“The same is true with AIG,” he said. “It was the right thing to do to step in. Here’s the problem. It’s almost like they’ve got — they’ve got a bomb strapped to them and they’ve got their hand on the trigger. You don’t want them to blow up. But you’ve got to kind of talk them, ease that finger off the trigger.”
Thing is, I’m not really sure we’re making any progress at talking them out of their terrorist attack, and I’m not convinced the terrorists have full control over whether or not their vests go off.
The Fear-Mongering to Silence the AIG Employees
/47 Comments/in Economics /by emptywheelThe memo AIG sent to employees offering safety tips might lead you to believe that AIG is concerned about its employees’ safety. And, true, it offers really practical advice about how to limit the chances that someone is going to attack an AIG employee: hide your badge, alert security if people are hanging around.
I do hope AIG employees–and all the banksters–remain safe.
But there’s one fact that suggests this memo is simply a scare tactic.
Edward Liddy, someone who has been on TV as the public face of AIG, took the train to DC for his testimony.
Whatever Liddy’s personal record — he is taking $1 in salary this year without a bonus and took the train to Washington for the hearing — lawmakers didn’t stop in their quest for the names.
If you are genuinely concerned about the safety of your employees, you do not let the most public of those employees take public transportation on a widely-publicized trip.
So I would suggest that the warnings from AIG might serve a completely different purpose (aside from instilling a sense of defensiveness that might draw employees closer together). Consider this warning, for example, ostensibly designed to keep employees safe:
Avoid public conversations involving AIG and do not engage any media personnel regarding the company.
You see, all but a few of the warnings AIG gave its employees have a dual effect: they remind employees to guard their personal safety (and I do hope they remain safe). But they also ensure that anyone trying to report on AIG will be regarded as a physical threat.
And the net effect of such fear-mongering is articles like this one, in which the employees at the highest risk AIGFP employees quoted as being concerned about their privacy and safety (in an article, funnily enough, that provides names and towns of residence), are ignoring the guidelines AIG gave them on protecting themselves. They are talking to the press!!!!
But I’m guessing that’s not exactly what happened–that Jackpot Jimmy somehow ignored the warnings and instead decided to gab to the press. You see, I find it rather curious that the two AIGFP employees described in the article–Jackpot Jimmy and Douglas Poling, the latter of whom got the biggest bonus–are now returning those bonuses. Read more →
Is AIG’s Reinsurance Side a House of Cards, Too?
/82 Comments/in Economics /by emptywheelThe other day, Atrios pointed to this passage, explaining that AIG was reinsuring some of its own insurance businesses.
Thomas Gober, a former Mississippi state insurance examiner who has tracked fraud in the industry for 23 years and served previously as a consultant to the FBI and the Department of Justice, says he believes AIG’s supposedly solvent insurance business may be at least as troubled as its reckless financial-products unit. Far from being "healthy," as state insurance regulators, ratings agencies and other experts have repeatedly described the insurance side, Gober calls it "a house of cards." Citing numerous documents he has obtained from state insurance regulators and obscure data buried in AIG’s own 300-page annual reports, Gober argues that AIG’s 71 interlocking domestic U.S. insurance subsidiaries are in hock to each other to an astonishing degree.
Most of this as-yet-undiscovered problem, Gober says, lies in the area of reinsurance, whereby one insurance company insures the liabilities of another so that the latter doesn’t have to carry all the risk on its books. Most major insurance companies use outside firms to reinsure, but the vast majority of AIG’s reinsurance contracts are negotiated internally among its affiliates, Gober says, and these internal balance sheets don’t add up. The annual report of one major AIG subsidiary, American Home Assurance, shows that it owes $25 billion to another AIG affiliate, National Union Fire, Gober maintains. But American has only $22 billion of total invested assets on its balance sheet, he says, and it has issued another $22 billion in guarantees to the other companies. "The American Home assets and liquidity raise serious questions about their ability to make good on their promise to National Union Fire," says Gober, who has a consulting business devoted to protecting policyholders. Gober says there are numerous other examples of "cooked books" between AIG subsidiaries. Based on the state insurance regulators’ own reports detailing unanswered questions, the tally in losses could be hundreds of billions of dollars more than AIG is now acknowledging. [my emphasis]
Masaccio pointed me to these two passages in AIG’s 10K, which sound like they may describe what Gober is talking about:
Various AIG profit centers, including DBG, AIU, AIG Reinsurance Advisors, Inc. and AIG Risk Finance, as well as certain Foreign Life subsidiaries, use AIRCO as a reinsurer for certain of their businesses, and AIRCO also receives premiums from offshore captives of AIG clients. In accordance with permitted accounting practices in Bermuda, AIRCO discounts reserves attributable to certain classes of business assumed from other AIG subsidiaries. (10)