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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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. 

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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. 

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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.

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