Geithner and Bernanke Visit Financial Services Liveblog

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. We need to give somebody somewhere in Federal govt to put non-banks out of their misery. A form of bankruptcy power under Constitution.

Bachus: To Garrett, Hensarling, Castle.

Garrett: Concerned both about Fed and Administration. Why did the Administration do an about face on disclosing counterparties? Did that undermine your independence? Why didn’t the Admin negotiate further with counterparties? I want to challenge claim that AIG’s problems originated with CDS stuff. OTS raised concerns in 2005. Geithner: Altering provisions in stimulus. Did Geithner raise the bonuses with President before paid?

Hensarling: Bonsues paid out by profitable companies makes sense. Taxpayer money making foreign insitutions whole. No convincing plan of profitability or taxpayer recoupment. [False outrage that Obama didn’t fix Bush’s mistakes!!! And outrage that the conference report–which Susan Collins participated in–included the bonus stuff] Unconstitutional tax on bonuses. Setting dangerous precedent of punishing people after the fact. What did the Obama Administration know and when did they know it? [No apparent outrage over the Bush Administration] If you like the way Obama Administration has been running AIG, you’re going to love socialized medicine.

[Hensarling has been reading Eliot Spitzer]

Kanjorski: Want to learn about plan, people, involved in AIG oversight. Plan to recover the loans to AIG. Outrage about sizeable retention bonuses. If Federal officials had exercised active oversight, we could have prevented that. 

Castle: I don’t see the transparency in this, some which relate to secretary, some which relate to Federal Reserve. We know, Mr. Sec, you were very involved back in September. Fed knew about bonuses in fall 2008. With that knowledge you would have known up until you told President. Then Dodd and the stimulus change. Could something have been done before we passed legislation last week? Maybe there wasn’t transparency, maybe it could have been prevented. 

Geithner: [Just reading from his written statement]

[Frank interrupts to yell at people holding signs]

Here’s Bernanke’s statement of why they had to bail out AIG (from his statement):

The Federal Reserve and the Treasury agreed that AIG’s failure under the conditions then prevailing would have posed unacceptable risks for the global financial system and for our economy. Some of AIG’s insurance subsidiaries, which are among the largest in the United States and the world, would have likely been put into rehabilitation by their regulators, leaving policyholders facing considerable uncertainty about the status of their claims. State and local government entities that had lent more than $10 billion to AIG would have suffered losses. 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. Global banks and investment banks would have suffered losses on loans and lines of credit to AIG, and on derivatives with AIG-FP. The banks’ combined exposures exceeded $50 billion.1 Money market mutual funds and others that held AIG’s roughly $20 billion of commercial paper would also have taken losses. In addition, AIG’s insurance subsidiaries had substantial derivatives exposures to AIG-FP that could have weakened them in the event of the parent company’s failure.

With the email that hits the big reason:

In addition, many of these same banks had borrowed securities from AIG’s securities lending program for which they had given AIG cash as collateral. Upon an AIG bankruptcy, the banks would have taken possession of the securities instead of receiving back their cash, exposing them to possible losses on those securities.

Bernanke up. He’s just reading his statement too.

Note, Bernanke’s statement does not include the words "Maiden Lane," and I don’t think he discusses it in his statement (though I could be wrong). 

Dudley says the Fed doesn’t have the ability to do everyday oversight:

In light of the exceptional size and scope of AIG’s operations, with over 110,000 employees in more than 130 countries, spanning hundreds of legal entities, it was clear from the beginning that the New York Fed – which had never been engaged in any regulatory oversight of the company – was not in a position to exert day-to-day management control over the company. Rather, the New York Fed’s actions have consistently been directed at securing its objectives as lender. As any lender in our position would do, the New York Fed has put into place a loan agreement that contains covenants designed to help ensure ultimate repayment of the loan – but these creditor’s rights do not create an ability to manage AIG.

Responsibility for AIG’s day-to-day affairs continues to rest with AIG’s Chief Executive Officer, Edward Liddy, under the oversight of AIG’s board of directors. Mr. Liddy, who has only become involved with AIG in a public-spirited attempt to resolve its troubled affairs, has made strides in dealing with AIG’s opaque corporate structure, lack of centralized controls, and complex risk exposures, but much remains to be done.

In light of the inherent conflicts that would arise from either the U.S. government or the Federal Reserve exerting ownership control over the world’s largest insurer, the Federal Reserve, with the support of the Treasury Department, directed in the loan agreement that an approximately 77.9 percent equity interest in AIG be issued to an independent trust established for the sole benefit of the United States Treasury. The trust, which now holds that controlling equity interest, is overseen by three independent trustees who are of the highest integrity and who have considerable experience leading major companies. These trustees have a legally binding obligation to exercise all of their rights as majority owner of AIG in the best interests of the U.S. taxpayer, with the proceeds of any ultimate sale of shares going directly to the Treasury of the United States.

So why aren’t those trustees here today? And why aren’t they named?

Also note, Dudley basically seems to have bought off on the extortion:

With respect to the retention awards owed to FP employees under their pre-existing contracts, we believe that Mr. Liddy weighed a number of factors in deciding not to attempt to prevent payment, including:

  • the likely negative effects of disruption in staffing at FP in managing its multi-billion dollar exposures;
  • legal advice that the contracts were valid – meaning that breaking them would likely increase the amount of company funds ultimately paid to the covered employees; and
  • the negative consequences to AIG’s business that could result from the public abrogation of contracts.

In conducting our oversight as lender, the New York Fed did not see reason to disagree with Mr. Liddy’s judgment from a risk perspective. Equally important, we did not think it was legally permissible – or within the proper role of the New York Fed – to attempt to substitute our judgment for that of Mr. Liddy in this circumstance, even though we found the payment of the retention awards extremely distasteful.

I wonder what these unnamed trustees running our insurance company thought?

Though Dudley seems to want to say it’s the trustees and Treasury that runs AIG:

Although oversight of TARP-related compensation matters rests with the Treasury Department, the New York Fed has played a role since September in reviewing the adequacy of AIG’s corporate governance procedures.

Also, breaking news: We’re going to keep some insurance companies for now:

Notably, we have recently agreed in principle to accept preferred interests in two of AIG’s large foreign life insurance subsidiaries, AIA and ALICO, in order to make repayment of our loan less dependent on forced divestitures into a depressed acquisition market.

No mention of long-term ownership of any soccer companies. 

10 replies
  1. plunger says:

    Geithner is a tool of the banksters – and a very bad liar.

    “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”

    Upton Sinclair

    Sinclair remarked in 1951:

    “The American People will take Socialism, but they won’t take the label. I certainly proved it in the case of EPIC. Running on the Socialist ticket I got 60,000 votes, and running on the slogan to ‘End Poverty in California’ I got 879,000.”

  2. TarheelDem says:

    Three trustees, eh? This is which veil of seven? The third, at best. Four more to go. Ah, transparency!

  3. plunger says:

    Geithner is such a weasel. 100 cents on the dollar was paid through the conduit of AIG to the counterparties (Goldman).


  4. plunger says:

    At the time that Goldman entered into the CDS “insurance” contracts (short bets made against the US Housing Bubble – and the entire future of the United States) – Goldman Sachs was NOT A BANK.

    Only after the implosion and the revelation that if AIG was insolvent – Goldman was too – did Goldman suddenly decide that it needed to call itself a “bank” – for the sole purpose of facilitating the “legal” transfer of US Taxpayer funds to the coffers of Goldman Sachs – whose demise would have been that of an “investment bank” – NOT a “bank.” The American people had NO INTEREST in saving Goldman Sachs. NONE.

    On September 21, 2008, Goldman Sachs received Federal Reserve approval to transition from an investment bank to a bank holding company.

    On September 22, 2008, the last two major investment banks in the United States, Morgan Stanley and Goldman Sachs, both confirmed that they would become traditional bank holding companies, bringing an end to the era of investment banking on Wall Street. [11] The Federal Reserve’s approval of their bid to become banks ended the ascendancy of the securities firms, 75 years after Congress separated them from deposit-taking lenders, and capped weeks of chaos that sent Lehman Brothers Holdings Inc. into bankruptcy and led to the rushed sale of Merrill Lynch & Co. to Bank of America Corp.

    Goldman was the second largest donor to the Barack Obama campaign

    • jdmckay says:

      Goldman was the second largest donor to the Barack Obama campaign.


      Article in yesterday’s (3-21) NYT’s biz section:

      (Chris) Matthews Renews Contract @ MSNBC
      … there was this diddy in discussion Matthew’s flirtations testing
      water of big fundraisers:

      (…)Last October, he (Matthews) was a guest at a dinner in Manhattan organized by Robert Wolf, president of UBS investment bank and one of Mr. Obama’s top fund-raisers(…)

      As BO/Geithner’s refinancing the crooks recovery plan has become clearer, I began looking for this type of thing and finding it all over the place.

      A few Wolf links…
      Money Chooses Sides (NYT Mag 4/16/07)

      The skeleton in Obama’s money closet (Canadian Free Press 8/08)

      There’s other refs on Wolf alone, plenty other financiers doing his bidding as well. I’m not sure Wolf is big bad wolf, and understand fundraising’s part of the deal.

      Still, after seeing what’s unfolded and how… BO’s planners and huge bet they’re making on TALF (and it’s just that, a bet) at expense of real fundamental change… just huge disappointment for me. It may jump start things, may get some portion of toxic assets off the books, may get some credit flowing… but does next to nothing to clean things up, build solid foundation, or provide higher degree of certainty as to fundamental organic econ growth he could have seeded.

      Instead, it’s financial guys calling all the shots just as before, really resting their lot on hopes TALF will push up housing prices enough so that bailed out bankers are willing to sell.

  5. Leen says:

    This morning on NPR they reported that Bernanke did not support the compensation packages. NPR also reported that 12 of AIG’s CEO’s have decided to return these bonuses. No names

  6. abba1943 says:

    It’s easy to make fun of Geithner – I come back to the Chorus Line analogy: brain 8, tongue 2 – but he’s the guy in the job. He and the new kid on the block evidently live in silos, so they don’t know that what they’re arguing for is the antithesis of the UAW argument, and my guess is that they never came out for the autoworkers. They aren’t where they are because they’re small “d” democrats.

    We need to stop whining and nit picking and help find a solution that gets the banks lending, even if someone makes money doing it. It’s too early to socialize the banks. Give them, and give people who have gotten rich by making good investment decisions, a crack at it. Not all FDR’s programs succeeded. Had no problem admitting he didn’t know all the answers, he had a number of redos and, Amity Shlaes notwithstanding, he did end the Depression (he closed banks, as professor Krugman suggests, but in a pre-regulation world – one in which 10,000 failed. New Deal agencies oversaw the construction of 39,000 schools and construction of much of the National Parks system, among other things). I have no doubt president Obama will do likewise. It won’t be easy, it won’t be quick, but he will prevail.

  7. abba1943 says:

    Gotta love the Republicans on Barney’s committee. While nearly everyone with a functioning brain knows that the lack of regulation played at least a part of what allowed so many financial institutions to cave in. While the Democrats speak for reducing (not eliminating, reducing) systemic risk, Republicans have raced to the periphery of the issue and they’re worried not about what is “Too Big to Fail” or how can we mitigate some inherent risk, but how much regulation will you Democrats stick our free market system with?

    This seems like a naked man being offered a free suit and worrying that the pants will be too big.

Comments are closed.