American International Group: Examining What Went Wrong, Government Inter- Vention, and Implications for Future Regulation
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HRG. 111–69 AMERICAN INTERNATIONAL GROUP: EXAMINING WHAT WENT WRONG, GOVERNMENT INTER- VENTION, AND IMPLICATIONS FOR FUTURE REGULATION HEARING BEFORE THE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS UNITED STATES SENATE ONE HUNDRED ELEVENTH CONGRESS FIRST SESSION ON AN EXAMINATION OF WHAT WENT WRONG WITH AMERICAN INTER- NATIONAL GROUP, WHERE GOVERNMENT INTERVENTION IS HEADED, AND THE IMPLICATIONS FOR FUTURE REGULATION MARCH 5, 2009 Printed for the use of the Committee on Banking, Housing, and Urban Affairs ( Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html U.S. GOVERNMENT PRINTING OFFICE 51–303 PDF WASHINGTON : 2009 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 VerDate Nov 24 2008 10:32 Aug 20, 2009 Jkt 048080 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 S:\DOCS\51303.TXT JASON COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS CHRISTOPHER J. DODD, Connecticut, Chairman TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama JACK REED, Rhode Island ROBERT F. BENNETT, Utah CHARLES E. SCHUMER, New York JIM BUNNING, Kentucky EVAN BAYH, Indiana MIKE CRAPO, Idaho ROBERT MENENDEZ, New Jersey MEL MARTINEZ, Florida DANIEL K. AKAKA, Hawaii BOB CORKER, Tennessee SHERROD BROWN, Ohio JIM DEMINT, South Carolina JON TESTER, Montana DAVID VITTER, Louisiana HERB KOHL, Wisconsin MIKE JOHANNS, Nebraska MARK R. WARNER, Virginia KAY BAILEY HUTCHISON, Texas JEFF MERKLEY, Oregon MICHAEL F. BENNET, Colorado COLIN MCGINNIS, Acting Staff Director WILLIAM D. DUHNKE, Republican Staff Director AARON KLEIN, Chief Economist DEBORAH KATZ, OCC Detailee CHARLES YI, Senior Policy Advisor DREW COLBERT, Legislative Assistant MARK OESTERLE, Republican Chief Counsel ANDREW OLMEM, Republican Professional Staff Member HESTER PEIRCE, Republican Counsel JIM JOHNSON, Republican Counsel DAWN RATLIFF, Chief Clerk DEVIN HARTLEY, Hearing Clerk SHELVIN SIMMONS, IT Director JIM CROWELL, Editor (II) VerDate Nov 24 2008 10:32 Aug 20, 2009 Jkt 048080 PO 00000 Frm 00002 Fmt 0486 Sfmt 0486 S:\DOCS\51303.TXT JASON CONTENTS THURSDAY, MARCH 5, 2009 Page Opening statement of Chairman Dodd .................................................................. 1 Opening statements, comments, or prepared statements of: Senator Shelby .................................................................................................. 4 Prepared statement ................................................................................... 42 Senator Johnson Prepared statement ................................................................................... 44 WITNESSES Donald Kohn, Vice Chairman, Board of Governors of the Federal Reserve System ................................................................................................................... 6 Prepared statement .......................................................................................... 44 Scott M. Polakoff, Acting Director, Office of Thrift Supervision .......................... 8 Prepared statement .......................................................................................... 49 Eric Dinallo, Superintendent, New York State Insurance Department .............. 9 Prepared statement .......................................................................................... 56 Response to written questions of: Senate Banking Committee ...................................................................... 60 (III) VerDate Nov 24 2008 10:32 Aug 20, 2009 Jkt 048080 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 S:\DOCS\51303.TXT JASON VerDate Nov 24 2008 10:32 Aug 20, 2009 Jkt 048080 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 S:\DOCS\51303.TXT JASON AMERICAN INTERNATIONAL GROUP: EXAM- INING WHAT WENT WRONG, GOVERNMENT INTERVENTION, AND IMPLICATIONS FOR FUTURE REGULATION THURSDAY, MARCH 5, 2009 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. The Committee met at 10:06 a.m., in room SD–538, Dirksen Sen- ate Office Building, Senator Christopher J. Dodd (Chairman of the Committee) presiding. OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD Chairman DODD. The Committee will come to order. Senator Shelby will be along in a minute or so, and we will just get under- way because I know people have busy schedules for the day. How we will proceed is I will make some opening comments, and when Senator Shelby comes on in, obviously he will have some opening comments to make. And then given the number of people here this morning, I am going to go right to our witnesses and then ask my colleagues’ indulgence to use their time for opening state- ments on the matter as well as getting to the questioning; other- wise, we might be here an hour and a half before we got to ques- tioning. So depending on—Richard, how are you? Senator SHELBY. Good morning. Chairman DODD. Good morning. I was just saying both of us will make opening statements, then get right to our witnesses, if that is all right with you. Senator SHELBY. Sure. Chairman DODD. And then we will proceed along the lines, and, again, we will try and keep the questioning somewhat limited in time so we can get to everyone here this morning. Well, this morning the Committee comes together to examine what went wrong with American International Group, what lessons can be drawn from this situation, and where the Government over- seers are headed. We have before us representatives from the State and Federal regulators of this insurance giant, as well as the Fed- eral Reserve that decided to launch the Government rescue of AIG last September. I want the Committee to be aware that we invited the Treasury Department to send a witness to testify here this morning, but they are unable to send anyone to the Committee this morning. And given the Treasury’s increasing responsibilities, effectively the (1) VerDate Nov 24 2008 10:32 Aug 20, 2009 Jkt 048080 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 S:\DOCS\51303.TXT JASON 2 owner and overseer of AIG—although that issue is one we will dis- cuss this morning as to actually where that ownership lies—I re- gret the Treasury did not have someone here this morning. In fairness to them, they are in a transitional period and obvi- ously putting a team together, and so I think there is some respect for whether or not they have the personnel on hand to be here. But, nonetheless, I would be remiss if I did not say that I am not pleased by the fact that we do not have someone here from Treas- ury to do some explaining as to what their role in this is and what role there will be in the coming weeks and months in all of that. Obviously, again, my colleagues are as aware of these statistics as anyone. We have 10,000 foreclosures a day in the country— these numbers get repeated all the time—20,000 layoffs each and every day happening all across our country. I think all of us wish we were here today instead talking about how to help those strug- gling to get by through no fault of their own, not an institution in- debted to sophisticated investors who should have known better and in many cases did know better. Instead we are here in the wake of the fourth plan to rescue AIG, once again committing tens of billions of dollars to a massive, failed institution, because, as re- ported recently last week, it effectively ‘‘has the world financial sys- tem by the throat.’’ And that we find ourselves in this situation at all is, in my mind, and the minds of many of my constituents, quite frankly, sickening. How did we come to this? That is the question this Committee seeks to answer today. Certainly there are an awful lot of reasons. If the financial meltdown was a man-made disaster due in part to bad mortgages, then AIG’s collapse was predicated in part on the company’s decision to essentially ensure securities backed by those mortgages and sell those derivatives to speculators, thus encour- aging more and more risky investments. When the credit markets seized up last September, AIG found itself on the verge of bankruptcy. In the wake of the decision by then-Secretary Paulson and Fed Chairman Bernanke to allow Leh- man Brothers to declare bankruptcy, the Federal Reserve decided to exercise its authority as lender of last resort by lending AIG up to $85 billion. In exchange, the Government took approximately 80-percent ownership of AIG, effectively taking over the company. At the time, the Fed, in their report required by Congress, told this Committee that they did not believe this deal with result in any ‘‘net cost to the taxpayers.’’ With that rosy projection, AIG went on to have the single worst quarter of any corporation in American history, losing over $60 billion. That effectively means that during the final 3 months of last year, after the Government had effectively taken it over, AIG lost more than $450,000 per minute, every minute of every day. And while the Federal Reserve and then-Secretary Paulson continued to provide additional Government funds to the company, the AIG ordeal has now required the taxpayers to put up upwards of $150 billion to keep the company from bankruptcy. Indeed, the Fed has provided another almost $40 billion to AIG through two separate Fed-owned and operated special purpose ve- hicles: Maiden Lane II and Maiden Lane III. Maiden Lane II was designed to absorb the problems associated with AIG’s secured VerDate Nov 24 2008 10:32 Aug 20, 2009 Jkt 048080 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 S:\DOCS\51303.TXT JASON 3