• (p77) - Robert Willumstad  (Former AIG CEO)
  • AIG was caught in a vicious circle.
  • The potential for downgrades from the rating agencies and the market fears caused AIG counterparties on a securities lending program and other transactions, not just those related to the credit default swaps, to require AIG to post additional collateral or demand the return of cash or investments, further increasing the need for liquidity. 

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• (p107) - Dr. TROSKE, COP Member - Okay. There’s a lot of discussion about lack of access to debt. Can you explain to me why AIG didn’t try to raise capital through an equity market?
• Robert WILLUMSTAD, Former AIG CEO -  It did. Going back in May of 2008, AIG raised $20 billion of capital which at the time I think was the largest capital raise ever done. The subsequent losses in the second quarter, which were announced in August, ate into a lot of that and again it wasn’t so much an issue of pure capital. This was liquidity that was the crisis that came about and so at probably the recommendation of my lawyers not do this, I would say to clarify some of the things that happened, because I think there’s a little mixture of capital-raising and liquidity issues that have gone on here, the private solution that was attempted on Friday, the 12th, the 13th, and the 14th, was an AIG private solution.
  • The Fed had not entered into any of those discussions. I had reported to the Fed on Saturday evening that we had made some progress towards raising capital from both secured lending facilities as well as new equity investments from private equity participants and that’s where the New York State Insurance Commissioner came into play.
  • But the number we were looking for was getting bigger, mostly in anticipation of what would happen to the markets on the Monday after Lehman Brothers. We started looking for 20, we found 20. The number then escalated by Saturday evening to 40 and I remember going to the Fed and explaining to both Tim Geithner and Secretary Paulson that we thought we could probably raise $30 billion this weekend, but the investors and New York State Insurance Commission would not go ahead unless they would be assured that the company would survive after receiving that money which was only, obviously, sound judgment.

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• (p132) - Michael Moriarty (Deputy Superintendent for Property and Capital Markets, New York State Insurance Department) -
  • Number two. The AIG crisis was the primary result of the credit default swaps issued by an entity that was, for all intents and purposes, an unregulated derivative shop that traded on the rating of AIG as a whole.

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• (p141) - Chair Elizabeth WARREN.
  • So I want to be clear, if I can, about setting the stage a little bit for this panel.
  • If you’ve read the testimony from the Fed and we’ve had multiple meetings now with the Fed, they basically have made the argument that negotiation was simply not possible, and that it was not possible because negotiation under these circumstances, particularly in the case of rapid dissent, is never possible, that ratings downgrades would have triggered multiple cross-defaults and contagion throughout the market, and that the insurance regulators would have seized the insurance companies and therefore destroyed the value of the entity and possibly caused losses to the insured, people around the country.
  • So the reason we asked this panel to come is that we wanted to probe that claim.
  • That’s what we’re here about, to just push back on this alternative.

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• (p144-145) -  Damon SILVERS. All right. Mr. Moriarty——
• Mr. MORIARTY. Yes?
• Mr. SILVERS [continuing]. You—it has been represented to us, and I think you heard some of it this morning, that absent what the Fed did and precisely the way it did it, there would have been a crisis for the insurance subsidiaries and their ability to maintain their business, pay their obligations, and the like, a crisis that’s so serious that it was absolutely necessary to rescue the parent in the manner the parent was rescued in order to avoid such an outcome.
  • I think there is a kind of implicit analysis made by the Federal Reserve and the Treasury in saying so, that whatever problems might have arisen in the insured subsidiaries, they would have been beyond the ability of the state insurance regulation and guarantee system to manage.
  • What is your response to both those propositions and specifically what was the view of the New York State Insurance regulators and the—I forget the term of art now, but there’s a sort of coordinating body of state insurance regulators. 
  • What was your view during the so-called Lehman weekend around these questions?
• Mr. MORIARTY. Sure. I’d like to bifurcate my answer into two parts.
  • We do not believe that the existing policyholders of the AIG property and casualty companies for sure or even the life insurance companies would have suffered any losses should there—would there have been a bankruptcy of the AIG holding company system.
  • State insurance laws through the McCarran-Ferguson Act clearly give the states the authority to regulate insurance companies and to rehabilitate and liquidate them, which is a different process from a bankruptcy.
  • So we would maintain that the existing policyholders would have been made whole, even if there was a bankruptcy.
  • The life insurance subsidiaries would have suffered significant losses and the cushion, which we call surplus, which is effectively capital between assets and liabilities, would have taken a severe hit, but we still think it would have been positive.
  • Now, when we look at AIG as a going concern that would have been a problem.
    • Clearly, the reputational risk of bankruptcy at the holding company level could shake the confidence of the policyholders on the property and casualty side.
    • Much of the business is placed by three big brokers.
    • If they had blacklisted AIG for all intents and purposes as a going concern, they would be gone; the same on the life insurance side.
    • So to the extent that there was a bankruptcy, there would be a concern as to the ability of the AIG companies, the insurance companies to proceed as a going concern.
  • Now that being said, there are options.
    • There could be sales of the book of business to existing insurance companies.
    • There could be transfers of certain parts of the books to other companies.
    • So, I mean, there could have been some money moved around.
    • There could have been rebranding.
  • I mean, it’s hard to speculate, but clearly the bankruptcy would have had a troublesome impact.

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• (p145) - Damon SILVERS. - Did you all communicate a view that—did your department or did, to your knowledge, other insurance regulators communicate a view to the Federal Reserve or to the Treasury during this period that the parent of AIG had to be rescued in the manner that it was rescued?
• Michael Moriarty (Deputy Superintendent for Property and Capital Markets, New York State Insurance Department - No, we didn’t.

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• (p218) - Mr. SILVERS. I wasn’t planning to ask this, but I now feel compelled to do so.
  • Is it not the case that in the week of September 15, 2008, that the cash calls that the company could not meet were in two lines of business and two lines of business only.
  • And but for those cash calls, none of this would have been necessary?
  • And those two lines of business were, and it depends on what— you know you can believe or not—you can argue I guess with the state insurance regulators, they certainly were the swaps business and they may have been the securities lending business. 
  • And but for those two enterprises, none of this would have occurred?
  • Is that not so?
• Mr. MILLSTEIN. That is not so. So let me——
• Mr. SILVERS. Are you seriously asserting that if you wipe those two pieces of business off the books, that AIG was nonetheless insolvent?
• Mr. MILLSTEIN. Let me——
• Mr. SILVERS. And are you accusing the New York State Insurance Commissioner of lying to this panel?
• Mr. MILLSTEIN. Can I answer the question? I’m trying to be——
• Mr. SILVERS. I’m just astounded at the lengths you will go to to defend something that may, in fact, be defensible in a perfectly straightforward way.

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• (p218) - Jim Millstein - Fifteen billion dollars of commercial paper at the parent company.
  • Eighty billion dollars of repo.
  • Again, the repo markets went into seizure after the Lehman Brothers filing. And a much smaller amount of repo.
  • Two trillion dollars of notional derivatives, $400 billion of credit derivatives, concentrated very much in the real estate part of the market. 

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• (p4) - Of equal concern, the default by AIG and AIGFP on more than $100 billion of institutional indebtedness, including $15 billion of commercial paper and $85 billion of short-term repurchase obligations⁹ would have exacerbated the stresses in the money market and repo markets driven by Lehman’s bankruptcy.
  • ⁹ Includes securities lending obligations. 

2010 0526 - COP Hearing - Jim Millstein (Chief Restructuring Officer U.S. Department of the Treasury) - 14p

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• (p219) - Damon SILVERS. What you’ve said is, is that—you said that all kinds of terrible things would have happened had they defaulted on the collateral posting obligations. But it was, but it’s the collateral posting obligations that were the triggering issue, right?
• Jim MILLSTEIN. (Chief Restructuring Officer U.S. Department of the Treasury): The collateral posting obligations were actually triggered by the downgrade. The downgrade——
• Mr. SILVERS. Yes, I know that. But that’s where the cash need was that week.
• Jim MILLSTEIN. I’m sorry.
• Mr. SILVERS. All the witnesses, all day long have said this.
• Jim MILLSTEIN. And the——
• Mr. SILVERS. You’re not disputing that.
• Jim MILLSTEIN. And the securities lending part——
• Mr. SILVERS. Right, exactly.
• Jim MILLSTEIN. They refused to roll over——
• Mr. SILVERS.  Okay, so we all agree.
• Jim MILLSTEIN.  Okay.