2009 0305 – GOV (Senate) – American International Group: Examining What Went Wrong, Government Intervention, And Implications for Future Regulation

  • 2009 0305 – GOV (Senate) – American International Group: Examining What Went Wrong, Government Intervention, And Implications for Future Regulation, (CSPAN) Government Intervention and Regulation of AIG, Chris Dodd (D-CT)  —  [BonkNote]
    • [PDF-72p,  VIDEO-CSPAN]
    • [Senate-page] 
    • FRB – Donald Kohn, Vice Chairman, Board of Governors of the Federal Reserve System
    • NAIC – Eric Dinallo, New York State Insurance Department –  Superintendent – 8p
    • OTS – Scott Polakoff, Office of Thrift Supervision
    • Senator Richard Shelby (R-AL)
    • Senate – Banking, Housing, and Urban Affairs
  • (p4-5) – Senator Richard Shelby (R-AL):  AIG’s problems, however, were not isolated to its credit default swap business.
    • Significant losses in AIG’s State-regulated life insurance companies also contributed to the company’s collapse.
    • Because AIG was unable to cover its obligations to both its securities lending and derivatives operations, it ultimately had to seek Federal assistance.
  • (p5) – Senator Richard Shelby (R-AL):  The causes of AIG’s collapse raise profound questions about the adequacy of our existing State and Federal financial regulatory regimes.
  • (p9) – Eric Dinallo, NAIC / New York State Insurance Department, Superintendent – I think that it is important to put some of these numbers in context, because I disagree with the concept that the securities lending program had much of anything to do with the problems at AIG. 
  • (p10) – Eric Dinallo:  The securities lending business … is …not the purpose or the reason for the Federal bailout.
    •  If there had been no Financial Products division involvement, I don’t think there would have been any bailout of AIG’s operating companies, certainly not the securities lending business. 
  • 14:40 – Senator Richard Shelby (R-AL) –
    • (p4) – Significant losses in AIG’s State-regulated life insurance companies also contributed to the company’s collapse.  
    • (p5) – More than $17 billion in Federal assistance has been used to recapitalize the State-regulated insurance companies to ensure that they are able to pay their policy holders’ claims.  
  • (p17) – Senator Richard Shelby (R-AL) –  Sir, AIG’s most recent annual report states that, quote, ”The two principal causes for its unprecedented strain on liquidity during the second half of 2008,” and these are their words, ”were a demand for the return of cash collateral under the U.S. securities lending program and collateral calls on credit default swaps issued by the Financial Products subsidiary.”
  • Eric Dinallo, NAIC / New York State Insurance Department, Superintendent – And I agree with that. I am sorry.
  • Senator SHELBY. –with the firm’s analysis of its own problems?
  • (p17) – Eric Dinallo – No, I don’t actually disagree with that. I agree with it. The only difference is causation.
    • As I said, the 25 other domestic life insurance companies that we have examined have not had a problem with their securities lending.
    • The causation of AIG’s problem with its securities lending business was essentially the run on the entire company caused by its exposure from Financial Products division.
  • 33:00 – Eric Dinallo, NAIC / New York State Insurance Department, Superintendent – Securities Lending didn’t have anything/much to do with AIG Collapse.
    • run on aig life, Reputational Risk
  • Securities Lending, RMBS, Liquidity, [C-3, 1980 SOA Paper], Run on AIG, 
  • Scott Polakoff – OTC
  • (p25) – Donald KOHN, Vice Chairman, Board of Governors of the Federal Reserve System
    • Our authority under the Federal Reserve Act is to make loans.
      • We thought it was a short-term liquidity situation- in mid-September, this is what we thought-and that if we could bridge this situation with liquidity, then the company could make the adjustments to keep itself a going concern.
      • It turned out that the problems were deeper…