Geithner & Bernanke in Financial Services Committee Hearing

Folks, I must recommend turning off the pundits on TV, CNBC and even many of the blogs and tune into CSPAN.

Today in the House Financial Services Hearing, Oversight of the Federal Government’s Intervention at American International Group, U.S. Treasury Secretary Tim Geithner, Federal Reserve Chair Ben Bernanke, along with New York Fed Chair William Dudley testified.

The Federal Reserve and the Treasury agreed that AIG’s failure under the conditions then prevailing would have posed unacceptable risks for the global financial system and for our economy. Some of AIG’s insurance subsidiaries, which are among the largest in the United States and the world, would have likely been put into rehabilitation by their regulators, leaving policyholders facing considerable uncertainty about the status of their claims. State and local government entities that had lent more than $10 billion to AIG would have suffered losses.
Workers whose 401(k) plans had purchased $40 billion of insurance from AIG against the risk that their stable value funds would decline in value would have seen that insurance disappear.
Global banks and investment banks would have suffered losses on loans and lines of credit to AIG, and on derivatives with AIG-FP. The banks’ combined exposures exceeded $50 billion.

Money market mutual funds and others that held AIG’s roughly $20 billion of commercial paper would also have taken losses. In addition, AIG’s insurance subsidiaries had substantial derivatives exposures to AIG-FP that could have weakened them in the event of the parent company’s failure.

I wanted to point out in Bernanke's testimony the actual AIG losses calculated. It is $100 billion dollars. The United States has given AIG to date $183 billion dollars. So, unless I am missing something here we could have let AIG go into receivership, paid off the above debts listed by the Fed and saved $83 billion dollars.

Bernanke continues to say if AIG had failed it could have caused a depression and financial collapse at the level of the Great Depression. Now we have heard this many times and the Lehman Brothers bankruptcy did create systemic risk.

But time has passed so can we now get to specifics? Show me the money at this point. Currently the Federal Reserve and the Treasury are asking for broad powers to seize financial institutions not covered under the FDIC. While this assuredly needs to be done, giving even more power to the U.S. Treasury or the Federal Reserve instead of an independent institution like the FDIC....well, talk about systemic risk in terms of too much power and not enough oversight....

Why would Bernanke and Geithner be asking for these powers now and do they want them immediately? If so, why? Maybe a compromise would be to allow them temporary powers with a sunset and transfer to a newly created agency like the FDIC.

Another thing to note is the statement AIG proper, the supposed safe and profitable divisions of AIG are exposed to AIG Financial Products derivatives. Out in the press it is implied that only AIGFP is the bad guy and it also implied the fictional derivatives were isolated to the Financial Products unit of AIG. The above implies this is not the case.

Earlier AIG CEO Liddy testified they had reduced their original $2.7 trillion in toxic assets to $1.6 trillion.

I think it's about time to discover what specifically constitutes a toxic asset and does that mean even more funneling at 100% payout of U.S. taxpayer money to other institutions?

Another question response is the claim the U.S. Treasury had no legal authority to put AIG into bankruptcy. Didn't the Federal Reserve and the Treasury simply need to not bail out AIG and thus get the job done?

Why with existing tools is this not possible or the bankruptcy courts cannot wind down toxic assets, or if someone has a detailed explanation, please post in the comments.

Watch the above video for yourself and tell me when really up against the ropes on questions both Bernanke and Geithner punt to either claim we had no legal authority, or try to imply somehow the question was idiotic. When those two deflects failed the final answer avoidance was: no decision has been made.

Anybody else wish Congressional hearings were done via online blogs, instant messaging and published documents? God these things are long and difficult to find the critical information contained within.



on the legality of nationalization

James Kwak of baseline scenario has an article up:

The legal doctrine in these areas is quite complex and there are probably several ways to apply it to various existing and future economic recovery programs. I do believe, however, that entities negatively affected by nationalization/conservatorship/receivership brought about under a brand-new program occur could make a very good argument that they are entitled to restitution under the Fifth Amendment. If that is the case, Congress can’t do anything to change the outcome. Of course, courts would still have to decide on the extent of “just compensation” that would remedy an otherwise illegal seizure. Historically, such awards have been based on market value, but the inquiry could get quite muddled in the financial arena.

As far as I can parse the issue seems to revolve around the idea of letting some debt go bad and not pay back creditors, which is key because the U.S. cannot be on the hook for trillions of dollars.