CONGRESSIONAL OVERSIGHT PANEL JUNE OVERSIGHT REPORT * THE AIG RESCUE, ITS IMPACT ON MAR- KETS, AND THE GOVERNMENT’S EXIT STRATEGY JUNE 10, 2010.—Ordered to be printed * Submitted under Section 125(b)(1) of Title 1 of the Emergency Economic Stabilization Act of 2008, Pub. L. No. 110–343 VerDate Mar 15 2010 00:44 Jun 30, 2010 Jkt 056698 PO 00000 Frm 00001 Fmt 6012 Sfmt 6012 E:\HR\OC\A698.XXX A698 rfrederick on DSKD9S0YB1PROD with HEARING E:\Seals\Congress.#13 CONGRESSIONAL OVERSIGHT PANEL JUNE OVERSIGHT REPORT VerDate Mar 15 2010 00:44 Jun 30, 2010 Jkt 056698 PO 00000 Frm 00002 Fmt 6019 Sfmt 6019 E:\HR\OC\A698.XXX A698 rfrederick on DSKD9S0YB1PROD with HEARING with DSKD9S0YB1PROD on rfrederick 1 CONGRESSIONAL OVERSIGHT PANEL JUNE OVERSIGHT REPORT * THE AIG RESCUE, ITS IMPACT ON MAR- KETS, AND THE GOVERNMENT’S EXIT STRATEGY JUNE 10, 2010.—Ordered to be printed * Submitted under Section 125(b)(1) of Title 1 of the Emergency Economic Stabilization Act of 2008, Pub. L. No. 110–343 U.S. GOVERNMENT PRINTING OFFICE 56–698 WASHINGTON : 2010 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 Mar 15 2010 05:52 Jun 30, 2010 Jkt 056698 PO 00000 Frm 00003 Fmt 5012 Sfmt 5012 E:\HR\OC\A698.XXX A698 rfrederick on DSKD9S0YB1PROD with HEARING E:\Seals\Congress.#13 CONGRESSIONAL OVERSIGHT PANEL PANEL MEMBERS ELIZABETH WARREN, Chair RICHARD H. NEIMAN DAMON SILVERS J. MARK MCWATTERS KENNETH TROSKE (II) VerDate Mar 15 2010 00:44 Jun 30, 2010 Jkt 056698 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 E:\HR\OC\A698.XXX A698 rfrederick on DSKD9S0YB1PROD with HEARING C O N T E N T S Page Glossary of Terms .................................................................................................... V Executive Summary ................................................................................................. 1 Section One .............................................................................................................. A. Overview ....................................................................................................... 13 B. AIG Before the Government Rescue .......................................................... 14 1. AIG’s History ......................................................................................... 14 2. AIG’s Structure and Regulatory Scheme ............................................ 15 3. The Causes of AIG’s Problems ............................................................. 18 4. Other Problematic Aspects of AIG’s Financial Position and Per- formance ................................................................................................. 36 5. The Role of Credit Rating Agencies ..................................................... 41 6. Were Regulators Aware of AIG’s Position? ......................................... 42 C. The Rescue ................................................................................................... 46 1. Key Events Leading up to the Rescue ................................................. 46 2. The Rescue Itself ................................................................................... 55 3. The Key Players in the Rescue ............................................................ 58 4. The Legal Options for Addressing AIG’s Problems in September 2008 ......................................................................................................... 61 D. Subsequent Government Actions ............................................................... 68 1. Securities Borrowing Facility: October 2008 ...................................... 68 2. The TARP Investment and First Restructuring: November 2008 .... 69 3. Maiden Lane II ...................................................................................... 71 4. Maiden Lane III .................................................................................... 73 5. Additional Assistance and Reorganization of Terms of Original Assistance: March and April 2009 ....................................................... 77 6. Government’s Ongoing Involvement in AIG ....................................... 79 E. The Impact of the Rescue: Where the Money Went .................................. 82 1. The Beneficiaries of the Rescue ........................................................... 86 2. How the Beneficiaries Would Have Fared in Bankruptcy ................. 95 F. Analysis of the Government’s Decisions .................................................... 105 1. Initial Crisis: September 2008 ............................................................. 105 2. Securities Borrowing Facility: October 2008 ...................................... 137 3. The TARP Investment and First Restructuring: November 2008 .... 138 4. Maiden Lane II ...................................................................................... 141 5. Maiden Lane III .................................................................................... 141 6. Additional Assistance and Reorganization of Terms of Original Assistance: March and April 2009 ....................................................... 148 7. Government’s Ongoing Involvement in AIG ....................................... 150 8. Differences between the Treatment of AIG and Other Recipients of Exceptional Assistance ...................................................................... 151 G. Assessment of the Role of Treasury and the Federal Reserve ................ 154 H. Current Government Holdings and Their Value ...................................... 156 1. Market’s View of AIG’s Equity ............................................................. 157 2. Residual Value of AIG: the Parameters of Debate ............................. 162 3. Administration and CBO Subsidy Estimates ..................................... 164 I. Exit Strategies .............................................................................................. 165 1. Overview ................................................................................................ 166 2. AIG’s Plans for Return to Profitability ................................................ 172 3. Treasury’s Plan for Exit ....................................................................... 186 J. Executive Compensation .............................................................................. 189 1. General ................................................................................................... 189 2. Initial Government Involvement .......................................................... 190 3. The AIGFP Retention Payments ......................................................... 190 4. The Special Master ............................................................................... 191 5. Effect on AIG’s Future .......................................................................... 195 (III) VerDate Mar 15 2010 00:44 Jun 30, 2010 Jkt 056698 PO 00000 Frm 00005 Fmt 5904 Sfmt 0486 E:\HR\OC\A698.XXX A698 rfrederick on DSKD9S0YB1PROD with HEARING IV Page Section One —Continued K. Conclusion .................................................................................................... 195 1. AIG Changed a Fundamental Market Relationship .......................... 195 2. The Powerful Role of Credit Rating Agencies ..................................... 196 3. The Options Available to the Government .......................................... 196 4. The Government’s Authorities in a Financial Crisis ......................... 198 5. Conflicts ................................................................................................. 199 Annexes: Annex I: Where the Money Went .................................................................... 202 Annex II: Detailed Timeline of Events Leading up to the Rescue of AIG ................................................................................................................. 203 Annex III: What are Credit Default Swaps? .................................................. 213 Annex IV: Legal Authorities ............................................................................ 221 Annex V: Securities Lending ........................................................................... 231 Annex VI: Details of Maiden Lane II Holdings ............................................. 232 Annex VII: Details of Maiden Lane III Holdings ........................................... 234 Annex VIII: Comparison of Effect of Rescue and Bankruptcy ...................... 236 Section Two: Additional Views ............................................................................... A. J. Mark McWatters ................................................................................... 241 Section Three: Correspondence with Treasury Update ........................................ 254 Section Four: TARP Updates Since Last Report ................................................... 255 Section Five: Oversight Activities .......................................................................... 272 Section Six: About the Congressional Oversight Panel ........................................ 273 Appendices: APPENDIX I: LETTER TO CHAIR ELIZABETH WARREN FROM AS- SISTANT SECRETARY HERB ALLISON RE: GM LOAN REPAY- MENT, DATED MAY 18, 2010 .................................................................... 274 APPENDIX II: LETTER TO SENATOR CHARLES GRASSLEY FROM