House - Committee on Oversight and Government Reform
(p40) - John L. MICA (R-FL) - It’s the responsibility of the Congress of the United States, and also it’s the responsibility of the Congress to start first with its—and clean up its own dirty cesspool, which is Fannie Mae. And we still don’t have a commitment or a date to do that. And I know exactly why. - [Bonk: Why?]
1:31 - Martin Sullivan Compensation - in Background
1:31 - nobody knows, - Lynn Turner
1:33 ish - CDS - AIG Rating, Downgraded, frightening, Collateral Call. There's no there there. - Dinallo
(p54) - 1:34 - 1:41 - Mr. BRALEY / Dinallo
(p46) - John TIERNEY (D-MA). Let me followup on that, Mr. Dinallo.
And Mr. Souder makes the point. You noted in your written statement that AIG is a holding company and owns a variety of insurance and other businesses.
And Massachusetts’ insurance commission was quick to share with me the fact that the problems at AIG are really those that deal not with its insurance subsidiaries but with its operations and holding company, those in the Financial Products Division, securities lending division and that area there.
⇒ The State-regulated insurance subsidiaries remain solvent and able to that pay their claims, correct?
Eric DINALLO, Superintendent, New York State Insurance Department) - Yes, sir.
(p47) - John TIERNEY (D-MA) And in fact, it’s that solvency and ability to pay their claims that really gives them the basis for the Federal loan and the comfort that it will be paid back.
Eric DINALLO, Superintendent, New York State Insurance Department) - Absolutely.
(p54) - 1:34-1:41 - BruceBRALEY (D-IA) - Mr. Dinallo, I want to start with you.
Twenty-five years ago, I was a research assistant to Professor Alan Whitus, who was updating the Keeton and Whitus basic text on insurance law; and I think both Professor Whitus and Professor Keeton would be rolling over in their graves seeing what has happened to the industry that they were so passionate about.
I think you would agree with me that industry has changed radically in the 25 years that I’ve been talking about.
Eric DINALLO, Superintendent, New York State Insurance Department - Yes. In particular going from mutual companies to publicly traded companies.
Mr. BRALEY. And a lot of those demutualizations resulted in a significant financial loss to policyowners who owned the shares of those mutual companies—who owned the mutual companies and during the conversion in many cases were screwed out of their financial share of those companies.
Mr. DINALLO. I might not use the same verb, but I will agree.
Mr. BRALEY. I think you get my point.
Mr. DINALLO. Well, I think it’s important for everyone to know there’s a very strong tension between policyholders’ interest and shareholders’ interest in a publicly traded company.
The board and management has a fiduciary interest to shareholders under our law, fiduciary interest to shareholders, but, at the same time, whenever they release capital to satisfy that to get a bigger return on equity, they are necessarily taking incremental protection against policyholders.
Mr. BRALEY. And you also have a fiduciary obligation to policyholders under their contractual obligation with the policyholder.
Mr. DINALLO. Sadly, there is some debate, actually, because they’ve been so trained under our law and after Enron, etc., to worry about fiduciary duty to shareholders that there is a good argument that, although it’s in their blood to worry about policyholders, the legal requirements are a little bit gray, actually.
(p91-92) - Robert Willumstad, Former AIG CEO) - In late July I met with the President of the Federal Reserve Bank of New York to discuss the situation. These were precautionary steps. Through the first week of September we believed AIG could weather the difficulties in the financial markets. When the market meltdown began the week of September 8th, the rating agencies indicated they would no longer wait to review AIG’s ratings until September 25. AIG was in a vicious circle. The rating agencies were considering a downgrade largely because of marketdriven liquidity concerns. But it was a downgrade or the threat of one that would trigger a liquidity crisis.
We worked around the clock during the week of September 8th to take measures that would provide AIG the liquidity needed to make it through the crisis, but the private markets simply could not provide enough liquidity. On September 9th I met again with the Federal Reserve Bank, and during the rest of the week I stayed in contact with the Federal Reserve and the Treasury Department.
On Tuesday, September 16, 2008, AIG was preparing for the unthinkable, bankruptcy. That afternoon the Federal Reserve and the Treasury Department told AIG they would provide the necessary liquidity because an AIG bankruptcy would have massive negative effects on the stability of the entire financial system. Terms of the offer were nonnegotiable. After a long discussion and with the advice of counsel and our financial advisers, the AIG Board of Directors accepted the Federal Reserve’s plan as the best available option.
(p131) - John Yarmuth - (D-KY) - We’ve had some testimony about the fact that only $60 billion has been drawn down of the $85 billion. What specifically was the $85 billion needed for?
(p131-132) - Robert WILLUMSTAD - (Former AIG CEO) - The $85 billion number was a number that was obviously determined by the Federal Reserve.
The $85 billion, I believe, was intended to be a loan to cover liquidity needs inside the company.
It’s been characterized before as covering losses which I think is not an accurate representation.
Again, the loan was taken down after I left the company, so I can’t be specific about it.
But what happens in a crisis of confidence like this and what was happening to AIG was not a question of losses.
AIG has had a lot of money borrowed over the years.
And when you go through one of these crises, people who have loaned you money in the past stop lending to you.
People who give you money or put money on deposit with you want it back; that in another environment, without this crisis of confidence, AIG could have easily met all of those obligations.
But when you have a series of counterparties who have decided for reasons of concern about the viability of the company stop doing business with you, the company can no longer meet its obligations.
It’s not very much different that if all the consumers of a particular bank showed up 1 day and asked for all of their money back, there’s no bank in America that could provide that.
Those dollars of deposits that were given to that bank are loaned out in the communities to small businesses, consumers, credit cards.
The whole system is driven around confidence and viability. And once that breaks down, there is no company, certainly in the United States and I think anywhere around the world, that can sustain a run on the institution.