2009 0402 – GOV (House) – The Collapse and Federal Rescue of AIG, and What it Means for the U.S., Hank Greenberg – AIG – Edolphus Towns (D-NY)

  • 2009 0402 – GOV (House) – The Collapse and Federal Rescue of AIG, and What it Means for the U.S., Hank Greenberg – AIG – Edolphus Towns (D-NY)  —  [BonkNote]
  • Hank Greenberg, Former AIG CEO
  • (p14) – One, wall off AIG Financial Products from the rest of the company and replace as many loans as possible with guarantees.  
  • (p14) – AIG’s business model did not fail, its management did.  
  • (p25) – When they lost the triple A rating after I left the company, that should have been a signal to discontinue writing credit default swaps and hedge the book, because, by their own admission, in their 10-K filings they said that they would be required to put up more collateral.
    • So they knew that, they disclosed that. And having done that, you would have thought that somebody, whether the  president, CEO or the chairman, should have called a halt and said, until we regain a triple A rating, we’re either going to slow down materially or discontinue, because if you have to put up more
      collateral, you got a problem.  
  • (p25) – AIG did not have a solvency problem, it had a liquidity problem.  
  • (p28) – First of all, Mr. Cummings, as far as I know, there are no losses whatever on the credit default swap. That was reported to the Senate Banking Committee last month by the head of the Thrift Administration.
    • It wasn’t losses that brought AIG down, AIG Financial Products, it was a lack of collateral that they had to put up. And the reason they needed more collateral was because they lost their triple A rating. 
  • (p28) – No. 2, because we were triple-A-rated, we did not have to put up collateral. So when AIG lost their triple A rating, and they wrote as much in 9 months as we wrote in 7 years, at a lower-quality business with multisector CDOs, that became a different book of business.  
  • (p63-64) – Bill FOSTER – (D-IL).
    • I have a couple of questions on your securities lending business, which I take it was responsible for a significant fraction of the difficulties.
    • And first off, who owned the securities that were being loaned, which business entity?
  • Mr. GREENBERG. Probably the life companies.
  • Mr. FOSTER. The life companies, OK. And so now, and now, who was actually performing the loaning and making the decisions?
  • Mr. GREENBERG. I think that was done by Win Neuger, the head of investments.
  • Mr. FOSTER. So this was done individually for each one of the life business units.
  • Mr. GREENBERG. I think he was the overall head of investments. And who was carrying out that day to day on his instructions, I can’t tell you. I’m not there.
  • Mr. FOSTER. I’m trying to understand if these were sort of tunnelling through the ring fence that was supposedly around–
  • Mr. GREENBERG. Normally what happens in security lending, an insurance company, a life company, has a huge amount of assets that’s been invested, securities.
    • A lot of banks and investment banks want to borrow them, say, for 30 days.
    • And they give you cash.
    • And you normally invest the cash in short-term receivables that will earn you 3 to 5 or 6 basis points.
    • Somebody got exuberant and were investing in for 30 base points, as I understand it, and a lot of it had toxic subprime assets involved.
    • And so when the banks wanted back their cash, AIG couldn’t sell the securities at that amount to cover that. And the Fed set up–
  • Mr. FOSTER. Could you explain why this wasn’t picked up by the individual insurance regulators?
  • Mr. GREENBERG. I don’t know. I wasn’t there.
  • Mr. FOSTER. So this you would view as a failure of the individual insurance regulator, the fact that this was allowed to occur?
  • Mr. GREENBERG. I would say that’s probably right, unless the amount involved was not considered by the regulator to be of such amount as to impair the solvency of the company.