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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 →

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. 

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 →

We’re Asking the Wrong Guys Trying to Solve the Economic Crisis

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Hank Paulson and Ben Bernanke are the wrong guys to solve this financial crisis.

I’m not talking, here, about Paulson’s very obvious conflicts of interest, though those are troubling. Paulson, after all, was CEO of one of the companies that in 2004 got an exemption on leverage limits–one of the moves that led to this crisis. And Paulson’s proposed bailout would disproportionally benefit his former company.

But I’m increasingly troubled by the ways in which Paulson and Bernanke are functionally inadequate to solve this problem–at least by themselves. By having Paulson and Bernanke solve this problem themselves, we guarantee that we’ll primarily address this as a finance crisis, and not an underlying structural crises in our economy.

While both Paulson and Bernanke have responsibility for the overall economy of the country, that responsibility is focused closely on monetary policy of the US.

The Fed describes its role as follows:

  • Conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices
  • Supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers
  • Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
  • Providing certain financial services to the U.S. government, to the public, to financial institutions, and to foreign official institutions, including playing a major role in operating the nation’s payments systems

And Treasury describes its mission:

The Treasury Department is the executive agency responsible for promoting economic prosperity and ensuring the financial security of the United States. The Department is responsible for a wide range of activities such as advising the President on economic and financial issues, encouraging sustainable economic growth, and fostering improved governance in financial institutions. The Department of the Treasury operates and maintains systems that are critical to the nation’s financial infrastructure, such as the production of coin and currency, the disbursement of payments to the American public, revenue collection, and the borrowing of funds necessary to run the federal government. The Department works with other federal agencies, foreign governments, and international financial institutions to encourage global economic growth, raise standards of living, and to the extent possible, predict and prevent economic and financial crises.

The Fed talks about "full employment and stable prices." Treasury talks about "economic prosperity" and raising standards of living and "encouraging sustainable economic growth." Read more →