[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF THE FEDERAL
GOVERNMENT'S INTERVENTION AT
AMERICAN INTERNATIONAL GROUP
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
MARCH 24, 2009
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-20
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48-873 WASHINGTON : 2009
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
----------
Page
Hearing held on:
March 24, 2009............................................... 1
Appendix:
March 24, 2009............................................... 67
WITNESSES
Tuesday, March 24, 2009
Bernanke, Hon. Ben S., Chairman, Board of Governors of the
Federal Reserve System......................................... 10
Dudley, William C., President and Chief Executive Officer,
Federal Reserve Bank of New York............................... 14
Geithner, Hon. Timothy F., Secretary, U.S Department of the
Treasury....................................................... 7
APPENDIX
Prepared statements:
Bachmann, Hon. Michele....................................... 68
Bernanke, Hon. Ben S......................................... 70
Dudley, William C............................................ 77
Geithner, Hon. Timothy F..................................... 83
OVERSIGHT OF THE FEDERAL
GOVERNMENT'S INTERVENTION AT
AMERICAN INTERNATIONAL GROUP
----------
Tuesday, March 24, 2009
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10 a.m., in room
2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Members present: Representatives Frank, Kanjorski, Waters,
Maloney, Velazquez, Watt, Ackerman, Sherman, Meeks, Moore of
Kansas, Capuano, Hinojosa, McCarthy of New York, Baca, Lynch,
Miller of North Carolina, Scott, Green, Cleaver, Ellison,
Klein, Wilson, Donnelly, Foster, Carson, Speier, Childers,
Minnick, Kilroy, Driehaus, Kosmas, Grayson, Himes, Peters,
Maffei; Bachus, Castle, King, Royce, Lucas, Paul, Manzullo,
Jones, Biggert, Capito, Hensarling, Garrett, Barrett, Gerlach,
Neugebauer, Price, McHenry, Campbell, Putnam, Bachmann,
Marchant, McCotter, McCarthy of California, Posey, Jenkins,
Lee, Paulsen, and Lance.
The Chairman. The hearing will come to order, and members
will be seated.
This is a very important public hearing. It will not be
disrupted. There will be no distractions. This is a chance for
us to have a thoughtful public discussion, both critical and
negative and positive. And there will be no disruption. If
behavior becomes disruptive, I will ask the people who are
causing the disruption to leave. I hope that is understood.
I will say that my own view is that critical conversation
questions, indeed whole sentences and even paragraphs, advance
even a negative view more than bumper stickers, no matter what
sort of bumper those stickers are worn on. And I will enforce
those rules.
We--I will just announce before we start with the time--
have two hearings this week. This hearing is a special hearing,
an ad hoc hearing, called as the second half of our
conversation about the question of bonuses paid to the AIG, but
it is also open to questions on other matters.
And, on Thursday, the Secretary of the Treasury will be
here again. So members will have a chance to question the
Secretary again on Thursday as part of the series we are having
on the question of regulatory reform--a process, I will remind
members, that really began in April of last year, when
Secretary Paulson made a very sweeping proposal for an
increased degree of regulatory authority. And we have been in a
conversation since then, and we will be continuing that.
Today's hearing deals with AIG. And I, in particular, want
to emphasize the importance of looking both backwards and
forwards. As we look back at what happened with AIG, the
context should be clear. And, as I have said, I know there are
people in the society, with whom I disagree scientifically, who
believe in a theory that says the world was created some 4,000-
plus years ago. That is not an issue today, but I do think it
is important to remember that the world was not created on
January 20, 2009, and there is an historical context. The
historical context goes back at least as far as the Bear
Stearns issue. And I think we need to set the stage.
Bear Stearns was failing, and the Secretary of the Treasury
and the Chairman of the Federal Reserve last year, Mr. Paulson
and Mr. Bernanke, together worked out an arrangement so that
the creditors of Bear Stearns--not Bear Stearns shareholders--
but that the creditors of Bear Stearns were compensated, for
fear that a failure to compensate them would have severe
negative consequences in the economy.
Then Lehman Brothers found itself in the same situation.
And when efforts to find another private party to step in
failed, the Bush Administration made the decision at the time,
I think in part in the context of criticism that had come from
the intervention with Bear Stearns' creditors, to allow it to
fail, so that Lehman Brothers failed and none of the creditors
of Lehman Brothers were aided.
I recently was visited by two Members of the House, our
colleague Ms. Speier, and our colleague Ms. Eshoo, because the
county they represent in California lost a lot of money when
Lehman Brothers went under. And we have others--we have many,
many other municipalities that are suffering from that.
But the decision was made not to intervene in Lehman
Brothers. And I think it was fueled in part by the view that
there had been too much intervention in Bear Stearns. People
said, ``Let's have free enterprise. Let's let it work.'' ``Free
enterprise'' means the right to fail with no safety net, so
Lehman Brothers was allowed to fail with no safety net.
A consensus formed, I believe, fairly soon after that, that
allowing Lehman Brothers to totally fail had severe negative
economic consequences. And that is the context which needs to
be remembered when we think about what was done by the Federal
Reserve, with the support of the Treasury, in 2008, with regard
to AIG.
My own view is that the negative example of Lehman
Brothers--and that included a number of political criticisms--
as well as a view that it had a severe economic negative effect
was, I believe, behind the decision to intervene for AIG.
I will remind people the decision to intervene on behalf of
AIG was a decision the Federal Reserve took under its statutory
authority. Unlike the subsequent vote in the House to create
the Troubled Asset Relief Program, there was no congressional
involvement, except you might say it was congressional
involvement when we sit in a room and are told something and we
say, ``Wow.'' That was the congressional involvement with
regard to that. We did raise some questions, but we were being
informed.
I cite that because the going-forward part--people talk
about the bonuses, but the going-forward part is this: I
believe we have two very important negative examples before us
of how not to proceed. One was the Lehman Brothers example,
where they were allowed to totally fail and there was no help
to any of the creditors. The other is the AIG example, where
there was help for all of the creditors. Neither one is what we
should be doing going forward.
The problem is--and I would contrast what we saw with
Lehman and with AIG with what we saw with Wachovia, IndyMac,
WaMu, and Countrywide. Banks also failed in 2008. And that was
not a happy occasion in every case, although those of us who
will mourn Countrywide are a very small number. But the fact is
that we have in place mechanisms involving a very well-run
FDIC, with the cooperation of other financial regulators, that
contained the damage. So when these banks failed, it was
neither a Lehman Brothers total negative on the economy or an
AIG excessive intervention in the minds of some on behalf of
creditors.
Our job--and, again, this was first raised by Secretary
Paulson last year and Mr. Bernanke, and we are now at the point
where we will be addressing that--is that when nonbank major
financial institutions need to be put out of their misery, we
need to give somebody the authority to do what the FDIC can do
with banks. It is called ``resolving authority.'' But it is
giving somebody--and it is, as people should understand, a form
of the bankruptcy power given under the Constitution. It allows
us to avoid the choice of all or nothing--nothing, in the case
of Lehman Brothers; all, in the case of AIG--equally
unacceptable alternatives, and our job is to work together to
try and find some other way.
The gentleman from Alabama is recognized for 5 minutes.
Mr. Bachus. Thank you, Mr. Chairman.
Mr. Chairman, I am going to distribute our time as follows:
3 minutes to the gentleman from New Jersey, Mr. Garrett; 3
minutes to the gentleman from Texas, Mr. Hensarling; and 2
minutes to the gentleman from Delaware, Mr. Castle.
The Chairman. The gentleman from New Jersey is recognized
for 3 minutes.
Mr. Garrett. I thank you, Mr. Chairman.
You know, today I look forward to hearing all the
testimony, as well as the answers to many questions that
Americans have, I believe, for this panel. Indeed, like many of
my colleagues, I have questions to pose to our witnesses.
To Chairman Bernanke, I am interested in hearing more about
the Fed's ongoing relationship with AIG's leadership as they
work together in running and also dismantling this entity on
behalf of its largest shareholder, the American taxpayer.
I am also concerned, though, about the Fed's transparency
and its independence in regards to publicly releasing details
about AIG's counterparties. As the chairman knows, back in
December, I sent a letter asking for specific counterparties to
AIG and who would benefit from that if they went insolvent.
In a reply I received on March 4th, I was told that, ``In
keeping with normal business practices, CDS contracts had not
been made publicly available because counterparties and AIG
considers this information to be commercially sensitive and
nonpublic information,'' endquote. Then, lo and behold, just
less than 2 weeks later, this information was released, and we
found out just who those counterparties were, some being
foreign banks.
So, since it is my understanding that AIG doesn't do
anything without the approval of the Fed these days, why, then,
did the Fed basically do an about-face on its policy of
disclosing AIG counterparties? Was it, in part, due to bowing
to pressure from the Administration in what many would say are
politically difficult times? And do you feel that there is
pressure in performing these regulatory functions and that
those pressures undermine your independence in performing your
monetary functions?
But probably more important than that whole issue is, why
didn't the Fed insist on negotiating with foreign and also
domestic counterparties for a more reasonable resolution to
these contracts instead of paying dollar-for-dollar, especially
when we learned after the fact that many of these
counterparties had themselves hedged their bets or hedged their
exposures with AIG anyway?
Next, I would also like to revisit Chairman Bernanke's
assertion the AIG problems originated, as he said, with
unregulated portions of its holding company. But, you know, we
heard testimony last week from OTS Acting Director Polakoff
that seems to contradict this assertion. Mr. Polakoff explained
that OTS was actively regulating that division and was aware of
AIG's CDS dealings and that they did raise concerns with AIG
back in 2005.
From Secretary Geithner, many members of this committee, as
well as the American people, would like a straight answer on
the handling of the AIG bonus fiasco. The Secretary has been
referred to as, ``the original architect'' of the AIG bailout.
There have also been some questions as to the extent of the
Treasury Department's involvement in altering provisions in the
so-called stimulus package, ensuring that the bonuses would, in
fact, be honored. Moreover, we are told he was informed about
the bonuses at least a week-and-a-half before they were paid
out. We also know the Secretary had specific conversations with
AIG's CEO, Mr. Liddy, about it just a few days before.
So, as Secretary Treasurer and a representative of the
United States and the people, which is the largest shareholder,
again, at AIG, I would like to hear from the Secretary his
recollection of that conversation with Mr. Liddy, and the
letter as well, and would like to know if he raised these
issues with the President before the bonuses were paid and did
the President sign off on them?
The Chairman. The gentleman from Texas for 3 minutes.
Mr. Hensarling. Thank you, Mr. Chairman.
And thank you, Mr. Secretary, and thank you, Chairman
Bernanke, for joining us today.
Bonuses paid out by profitable companies to outstanding
employees make sense. Taxpayer-funded bonuses paid out by
failing companies who owe taxpayers money makes no sense. The
close to $200 million in bonuses paid out to AIG's employees
was merely last week's TARP outrage of the week. The outrage,
however, pales in comparison to the outrage that taxpayers have
now seen in 4 different bailouts and have pumped $173 billion
into a failed company with no apparent end in sight.
It pales in comparison to the outrage that taxpayer money
is being used to make counterparties whole, many of which are
foreign financial institutions. They assumed a risk that the
school teacher in Mesquite, Texas, who is now helping make
those counterparties whole, did not take.
It also pales in comparison to the outrage that we have
seen no convincing plan of sustainability, profitability, or
taxpayer recoupment that has been presented to us, this
committee, or the Congress, much less the American people.
And finally, it pales in comparison to the outrage that we
should have that the Democrat leadership in Congress and the
Obama Administration either knew about these bonuses or should
have known about these bonuses and could have stopped them.
After we learned a provision in the so-called stimulus
legislation--which, as a practical matter, the Republicans were
not permitted to read--ensured that these bonuses would be paid
out, we witnessed the spectacle of Speaker Pelosi pointing a
finger at Senator Dodd, Senator Dodd pointing a finger at
Secretary Geithner, and Secretary Geithner and the Treasury
staff seemingly pointing a finger at Senator Dodd. In a town
where few are loathe to brag about legislation they authored,
this bonus-enabling provision appears to be one of a kind, in
that it is an apparent orphan.
The House went to great lengths to cover up this
embarrassment, passing what many believe to be an
unconstitutional tax to punish action with which Congress did
not agree. We could have simply required AIG to pay back 100
percent of the bonuses before they receive another bailout,
which we all know is coming. But the majority insisted on
setting the dangerous precedent of punishing people after the
fact who engaged in conduct with which they did not agree.
Secretary Geithner, I hope this legislation has not
jeopardized your efforts to attract the private portion of your
public-private investment partnerships.
There is something else that is needed, Mr. Secretary. The
public needs a straight answer: What did the Obama
Administration know, and when did they know it? For your plan
to succeed, it needs confidence. And for there to be confidence
restored, there must be openness, accountability, and honesty.
As one of my colleagues told me last evening, if you like
the way the government has been running AIG, you are going to
love socialized health care.
The Chairman. The gentleman from Pennsylvania is recognized
for 3 minutes.
Mr. Kanjorski. Good morning, Mr. Chairman.
Thank you for working with me to schedule this important
hearing to hear directly and publicly from those Federal
entities now responsible for overseeing American International
Group, or AIG. As I said last week, the Treasury Department and
the Federal Reserve have much to explain not only to us, but
also to the American people.
Since last fall when it received governmental assistance
for the first time, I have maintained an active, ongoing, and
strong interest in AIG. Early on, I wrote to the Federal
Reserve to inquire about its oversight of AIG. I have contacted
them regularly since then. After AIG's TARP investment, I also
contacted the Treasury Department about these matters.
Taxpayers now own 80 percent of AIG. Today, I therefore
hope that we can learn more about how Federal officials are
protecting the taxpayers' interest in AIG. I also want to learn
more about the plan, the people, and the resources dedicated to
AIG oversight.
Additionally, because the Federal Reserve was the first to
intervene in AIG, I would greatly appreciate an explanation
from them on how and why they made the decision to get
involved. Further, I want to know the plan to recover the loans
from AIG so that taxpayers can be paid back in full with
interest, as quickly as possible.
During the last week, the American people have rightly
expressed outrage about the sizable retention bonuses given to
workers at the very unit that caused AIG to seek Federal aid.
If Federal officials had exercised effective, proactive
oversight at the company, we could have prevented this problem.
Going forward, I would like the Federal Reserve and Treasury to
be more active and transparent in their oversight of AIG.
That said, Mr. Chairman, we are in the midst of an economic
crisis. As a result, the Treasury Department and the Federal
Reserve have assumed an extraordinary amount of responsibility,
and they have worked to develop and implement a broad array of
innovative programs. As such, they may lack the resources and
attention needed to properly oversee all aspects of AIG.
During the WorldCom bankruptcy, however, the Securities and
Exchange Commission and WorldCom agreed to a private, corporate
monitor to oversee compensation at WorldCom. I would welcome
the views of our witnesses about whether the Congress should
consider a similar appointment with respect to AIG now.
Moreover, I want us to focus our deliberations today on
whether powers exist in the Federal Government to unwind AIG in
an orderly manner, if necessary. If not, I would like to learn
about the powers the government needs to disband and dissolve
nondepository Federal institutions.
In sum, Mr. Chairman, I look forward to hearing from our
witnesses about these important matters, and I yield back the
balance of my time.
The Chairman. The gentleman from Delaware for 2 minutes.
Mr. Castle. Thank you, Mr. Chairman.
We talk about transparency a lot, and I just don't see the
transparency here. And I still have a lot of questions about
all this, some of which relate to the Secretary, and some of
which relate to the Federal Reserve.
But we know, Mr. Secretary, that you were very involved in
the AIG business back in the fall of 2008. In fact, when you
were head of the New York Fed, that is where the first tranche,
the first loan came from. And we don't know what you knew at
that point, but, according to a spokesman for the Federal
Reserve, the Federal Reserve, the Treasury, and the New York
attorney general knew about the AIG bonuses in the fall of
2008. I would assume, with that knowledge, you would have known
it all the way up until you eventually, apparently, told the
President.
Then we have the whole business with Senator Dodd and the
language change. I don't know who was in the room or who got
that language changed in the stimulus program, but the new
language was the prohibition required under clause (i),
``should not be construed to prohibit any bonus payment
required to be paid pursuant to a written employment contract
executed on or before February 11, 2009.'' To me, that is a
place where it could have been stopped. And I don't know who
was in that room when that was done or who drafted that
language. Senator Dodd, I think, originally said he did it, and
then he pointed the finger at others, not at you necessarily,
but at others, and that is a matter of some concern.
Also, I have seen and read anecdotally, at least, that the
Federal Reserve shared with Treasury all the discussions they
had since you left, Mr. Secretary, and went on to the position
of being the nominee and then the Secretary of the Treasury,
which would raise a concern of when were you reminded about
these bonuses.
And we raise all these questions because, could something
have been done before we passed legislation that probably
nobody really wanted to vote for last week that may be leading
to the fact that these bonuses are now being repaid? But the
bottom line is maybe there wasn't transparency, maybe it could
have been prevented, and I hope we can get some of those
questions answered today.
I yield back.
The Chairman. We will now begin with the testimony of the
Secretary of the Treasury, please.
STATEMENT OF THE HONORABLE TIMOTHY F. GEITHNER, SECRETARY, U.S
DEPARTMENT OF THE TREASURY
Secretary Geithner. Thank you, Mr. Chairman. Good morning,
Ranking Member Bachus, and members of the committee. It is a
privilege to be in this room again, testifying before you. We
are debating important, consequential issues for the country. I
welcome the attention you are bringing to it. I am going to try
to answer as many of your questions as I can in my oral
statement, but I am sure we will need to go over many of these
things in more detail.
I am very pleased to be here with Chairman Bernanke and
President Bill Dudley of the New York Fed.
AIG highlights very broad failures of our financial system.
Our regulatory system was not equipped to prevent the buildup
of dangerous levels of risk. Compensation practice rewarded
short-term profits over long-term financial stability,
overwhelming the checks and balances in the system.
We came into this crisis as a country--and this is a tragic
thing--we came into this crisis without the authority and the
tools necessary to contain the damage to the American economy
posed by the very severe pressures working through the
financial system.
Now, I share the anger and frustration of the American
people, not just about the compensation practices at AIG and in
other parts of our system, but that our financial system
permitted a scale of risk-taking that has caused grave damage
to the lives of so many Americans. The companies insured by AIG
in the United States alone employ one in three Americans. AIG
directly guarantees over $30 billion of 401(k) and pension plan
investments and is the leading provider of retirement services
for teachers and education institutions.
In September, at a time of unprecedented financial market
stress, losses on derivatives contracts entered into by AIG's
Financial Products group forced the entire company to the brink
of failure. The Department of the Treasury, the Federal
Reserve, and the Federal Reserve Bank of New York acted to
prevent the collapse of AIG.
That action was based on a judgment, a collective judgment,
that AIG's failure would have caused catastrophic damage--
damage in the form of sharply lower equity prices and pension
values, higher interest rates, and a broader loss of confidence
in the world's major financial institutions. This would have
intensified an already-deepening global recession, and we did
not have the ability to contain that damage through other
means. And we did not have the authority to unwind AIG.
For these reasons, with extreme reluctance, on September
16th, the Federal Reserve Board authorized an $85 billion
revolving credit facility to provide liquidity and avoid
default. As a condition of that loan, 79.9 percent of the
shares of the company were placed in a trust run by appointees
of the Federal Reserve Bank of New York. The government
installed a new management team and began the process of
restructuring AIG's board. And the new management team
committed to return AIG to its core insurance business by
winding down its derivatives trading operation and selling non-
core businesses.
This loan, of course, was only the first step in a series
of efforts to stabilize the company and provide the funding and
liquidity necessary to execute that restructuring plan.
Following that initial action in September, the Federal Reserve
Bank of New York initiated a broad review, using outside
experts, of the full range of executive compensation plans that
exist across this large company.
In November, as part of the government's infusion of
capital, the Treasury Department imposed the executive
compensation conditions and standards that were required under
the Emergency Economic Stabilization Act.
Earlier this month, in March, when in response to further
losses on the company's portfolio we committed additional
resources alongside the Fed, we made that assistance subject to
forthcoming conditions on executive compensation that were
based on both the President's proposals of February 4th and the
provisions adopted in the American Reinvestment and Recovery
Act.
Now, on March 10th, I received a full briefing from my
staff on the details and extent of AIG FP's pending retention
payments, including information on the details of payments to
individual executives. I found those payments, as have so many,
deeply troubling. And after consulting with colleagues at the
Fed and exploring our legal options, I called Ed Liddy, the CEO
of this company, and asked him to seek to renegotiate these
payments.
He explained that the contracts for the retention payments
were legally binding and pointed out the risk that, by
breaching the contract, some employees might have a claim under
Connecticut law to double payment of the contracted amounts. He
committed, however, to renegotiate and reduce future payments
totaling hundreds of millions of dollars, and that process is
now underway.
In addition, Treasury is working with the Department of
Justice to determine what legal avenues may be available to
recoup retention bonuses that have already been paid out and
have not been voluntarily repaid. Treasury will also impose on
AIG a contractual commitment to pay the Treasury from the
operations of the company the amount of retention awards not
recouped. And, finally, Treasury will deduct from the $30
billion in recently committed capital assistance an amount
equal to those payments.
Now, this issue of executive compensation extends beyond
AIG and requires substantial reform of the incentives and
compensation throughout the financial sector. As we move
forward, we need to ensure that taxpayer resources do not
reward failure but are used to get our financial system back to
the business of providing credit on reasonable terms to
American businesses and families.
I know that much of the public anger has fallen on Mr.
Liddy, but this is not fair. Mr. Liddy did not create this
mess; he did not seek this job. He agreed, in response to a
request by the Government of the United States, to work to
restructure the company and help us get back the assistance
provided by the taxpayer. And in taking on what I think is the
most challenging job in the American financial system today, he
inherited an enormous range of problems, including these
retention contracts that are the understandable source of
public outrage.
AIG has thousands of employees who are working now, every
day, to unwind the very business that got us into this
situation and return AIG to the business of insurance. They are
working hard to reduce the company's risks and exposures, and
it is important that we support them in this effort to wind
down AIG in an orderly way that protects the American taxpayer.
Now, in addition to the problems with executive
compensation, this financial crisis has revealed very
problematic gaps in the regulatory structure of governing our
financial markets. The lack of an appropriate regulatory regime
and resolution authority for large nonbank financial
institutions contributed to this crisis and will continue to
constrain our capacity to address future crises. I will testify
before this committee on Thursday and discuss in that context a
broad set of regulatory reform proposals, particularly those
related to mitigating systemic risk, to creating a more stable
financial system.
The Chairman. Mr. Geithner, will you stop for a moment,
please?
Will you please act your age back there and stop playing
with that sign? If you have no greater powers of concentration,
then you can leave the room. We are trying to have a serious
discussion, which will include, as you understand, a lot of
criticism. We really need people to grow up.
Secretary Geithner. Thank you, Mr. Chairman.
As we have seen with AIG, distress at large, complex
financial institutions can pose risks as dangerous as those
that led the United States to establish a full framework of
tools for dealing with banks. We need to extend those
protections and authorities to cover the risks posed by our
more diverse and complicated financial system today. And we are
proposing legislation to provide those tools, and look forward
to working with this committee and the Congress to pass such
legislation as quickly as possible.
The proposed resolution authority would allow the
government to provide financial assistance to make loans to an
institution, to purchase its obligations or assets, to assume
or guarantee its liabilities, and to purchase an equity
interest. The U.S. Government, as conservator or receiver,
would have additional powers to sell or transfer the assets or
liabilities of the institution in question, to renegotiate or
repudiate the institutions' contracts, and to prevent certain
financial contracts with the institution from being terminated
on account of conservatorship or receivership.
This proposed legislation would fill a significant void in
the current financial services regulatory structure in respect
to these large, complex institutions. And implementation would
be modeled on the resolution authority that the FDIC has under
current law with respect to banks.
This an extraordinary time for our country, and your
government has been forced to take extraordinary measures. We
will do what is necessary to stabilize our financial system
and, with the help of the Congress, develop the tools we need
to make our economy more resilient and our financial system
more stable and more just. We need to work together to create
an environment where it is safe to save and invest and where
all Americans can trust the rules governing their financial
decisions.
Thank you, Mr. Chairman.
[The prepared statement of Secretary Geithner can be found
on page 83 of the appendix.]
The Chairman. Mr. Bernanke?
STATEMENT OF THE HONORABLE BEN S. BERNANKE, CHAIRMAN, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Bernanke. Thank you, Chairman Frank, Ranking Member
Bachus, and other members of the committee. I appreciate having
this opportunity to discuss the Federal Reserve's involvement
with AIG.
In my testimony, I will describe why supporting AIG was a
difficult but necessary step to protect our economy and
stabilize our financial system. I will also discuss issues
related to compensation and note two matters raised by this
experience that merit congressional attention.
We at the Federal Reserve, working closely with the
Treasury, made our decision to lend to AIG on September 16th of
last year. It was an extraordinary time. Global financial
markets were experiencing unprecedented strains and a worldwide
loss of confidence. Fannie Mae and Freddie Mac had been placed
into conservatorship only 2 weeks earlier, and Lehman Brothers
had filed for bankruptcy the day before. We were very concerned
about a number of other major firms that were under intense
stress.
AIG's financial condition had been deteriorating for some
time, caused by actual and expected losses on subprime
mortgage-backed securities and on credit default swaps that
AIG's Financial Products unit, AIG FP, had written on mortgage-
related securities. As confidence in the firm declined and with
efforts to find a private-sector solution unsuccessful, AIG
faced severe liquidity pressures that threatened to force it
imminently into bankruptcy.
The Federal Reserve and the Treasury agreed that AIG's
failure under the conditions then prevailing--
The Chairman. Please, with all--no, you understood, you had
the sign up. The next one to hold a sign--it is distracting to
people. I understand that there are some people for whom
rational discussion is not an appropriate means of expressing
themselves. You are entitled to do that in general but not in a
way that interrupts those of us who are trying to have rational
discussions. So the next one who holds a sign will be ejected.
I do not know how you think you advance any cause to which you
might be attached by this kind of silliness.
Mr. Bernanke, please proceed.
Mr. Bernanke. Thank you, Mr. Chairman.
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 in 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 exposure 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 have substantial derivatives
exposure to AIG FP that could have weakened them in the event
of the parent company's failure.
Moreover, as the Lehman case clearly demonstrates, focusing
on the direct effects of a default on AIG's counterparties
understates the risk to the financial system as a whole. Once
begun, a financial crisis can spread unpredictably. For
example, Lehman's default on its commercial paper caused a
prominent money market mutual fund to break the buck and
suspend withdrawals, which in turn ignited a general run on
prime money market mutual funds, with resulting severe stresses
in the commercial paper market. As I mentioned, AIG had about
$20 billion in commercial paper outstanding, so its failure
would have exacerbated the problems of the money market mutual
funds.
Another worrisome possibility was that uncertainties about
the safety of insurance products could have led to a run on the
broader insurance industry by policyholders and creditors.
Moreover, it was well-known in the market that many major
financial institutions had large exposures to AIG. Its failure
would likely have led financial market participants to pull
back even more from commercial and investment banks, and those
institutions perceived as weaker would have faced escalating
pressure.
Recall that these events took place before the passage of
the Emergency Economic Stabilization Act, which provided the
funds that the Treasury used to help stem a global banking
panic in October. Subsequently, it is unlikely that the failure
of additional major firms could have been prevented in the wake
of a failure of AIG. At best, the consequences of AIG's failure
would have been a significant intensification of an already
severe financial crisis and a further worsening of global
economic conditions. Conceivably, its failure could have
resulted in a 1930's-style global financial and economic
meltdown, with catastrophic implications for production,
income, and jobs.
The decision by the Federal Reserve on September 16, 2008,
with the full support of the Treasury, to lend up to $85
billion to AIG should be viewed with this background in mind.
At that time, no Federal entity could provide capital to
stabilize AIG, and no Federal or State entity outside of a
bankruptcy court could wind down AIG.
Unfortunately, Federal bankruptcy laws do not sufficiently
protect the public's strong interest in ensuring the orderly
resolution of nondepository financial institutions when a
failure could pose substantial systemic risks, which is why I
have called on the Congress to develop new emergency resolution
procedures. However, the Federal Reserve did have the authority
to lend on a fully secured basis consistent with our emergency
lending authority provided by the Congress and our
responsibility as the Central Bank to maintain financial
stability.
We took as collateral for our loan AIG's pledge of a
substantial portion of its assets, including its ownership
interest in its domestic and foreign insurance subsidiaries.
This decision bought time for subsequent actions by the
Congress, the Treasury, the FDIC, and the Federal Reserve that
have avoided further failures of systemically important
institutions and have supported improvements in key credit
markets.
Having lent AIG money to avert the risk of a global
financial meltdown, we found ourselves in the uncomfortable
situation of overseeing both the preservation of its value and
its dismantling--a role quite different from our usual
activities. We have devoted considerable resources to this
effort and have engaged outside advisors. Using our rights as
creditor, we have worked with AIG's new management team to
begin the difficult process of winding down AIG FP and to
oversee the company's restructuring and divestiture strategy.
Progress is being made on both fronts.
However, financial turmoil and a worsening economy since
September have contributed to large losses at the company, and
the Federal Reserve has found it necessary to restructure and
extend our support. In addition, under its Troubled Asset
Relief Program, the Treasury injected capital into AIG in both
November and March.
Throughout this difficult period, our goals have remained
unchanged: to protect our economy and preserve financial
stability; and to position AIG to repay the Federal Reserve and
return the Treasury's investment as quickly as possible.
In our role as creditor, we have made clear to AIG's
management, beginning last fall, our deep concern surrounding
compensation issues at AIG. We believe it is in the taxpayers'
interest for AIG to retain qualified staff to maintain the
value of the businesses that must be sold to repay the
government's assistance. But, at the same time, the company
must scrupulously avoid any excessive and unwarranted
compensation. We have pressed AIG to ensure that all
compensation decisions are covered by robust corporate
governance, including internal review, review by the
compensation committee at the board of directors, and
consultations with outside experts.
Operating under this framework, AIG has voluntarily limited
the salary, bonuses, and other types of compensation for 2008
and 2009 of the CEO and other senior managers. Moreover,
executive compensation must comply with the most stringent set
of rules promulgated by the Treasury for TARP fund recipients.
The New York attorney general has also imposed restrictions on
compensation at AIG.
Many of you have raised specific issues with regard to the
payout of retention bonuses to employees at AIG FP. My reaction
upon becoming aware of these specific payments was that,
notwithstanding the business purposes that might be served by
this action, it was highly inappropriate to pay substantial
bonuses to employees of a division that had been the primary
source of AIG's collapse.
I asked that the AIG FP payments be stopped but was
informed that they were mandated by contracts agreed to before
the government's intervention. I then asked that suit be filed
to prevent the payments. Legal staff counseled against this
action on the grounds that Connecticut law provides for
substantial punitive damages if the suit would fail. Legal
action could thus have the perverse effect of doubling or
tripling the financial benefits to the AIG FP employees. I was
also informed that the company had been instructed to pursue
all available alternatives and that the Reserve Bank had
conveyed the strong displeasure of the Federal Reserve with the
retention payment arrangement.
I strongly supported President Dudley's conveying that
concern and directing the company to redouble its efforts to
renegotiate all plans that could result in excessive bonus
payments. I have also directed staff to work with the Treasury
and the Administration in their review of whether the FP bonus
and retention payments can be reclaimed. Moreover, the Federal
Reserve and the Treasury will work closely together to monitor
and address similar situations in the future.
To conclude, I would note that AIG offers two clear lessons
for the upcoming discussion in the Congress and elsewhere on
regulatory reform:
First, AIG highlights the urgent need for new resolution
procedures for systemically important, nonbank financial firms.
If a Federal agency would have had such tools on September
16th, they could have been used to put AIG into conservatorship
or receivership, unwind it slowly, protect policyholders, and
impose haircuts on creditors and counterparties as appropriate.
That outcome would have been far preferable to the situation we
find ourselves in now.
Second, the AIG situation highlights the need for strong,
effective, consolidated supervision of all systemically
important firms. AIG built up its concentrated exposure to the
subprime mortgage market largely out of the sight of its
functional regulators. More effective supervision might have
identified and blocked the extraordinarily reckless risk-taking
at AIG FP.
These two changes could measurably reduce the likelihood of
future episodes of systemic risk like the one we faced at AIG.
Thank you, Mr. Chairman.
[The prepared statement of Chairman Bernanke can be found
on page 70 of the appendix.]
The Chairman. Thank you.
Mr. Bernanke, let me go back again. The context is
important, and I do want to be clear. There was some reference
earlier to TARP--excuse me.
Oh, I am sorry. Mr. Dudley hasn't given his statement yet.
I didn't realize--I hadn't looked at the agenda, and I didn't
know Mr. Dudley was going to give a statement.
Go ahead, Mr. Dudley.
STATEMENT OF WILLIAM C. DUDLEY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, FEDERAL RESERVE BANK OF NEW YORK
Mr. Dudley. Good morning, Chairman Frank, Ranking Member
Bachus, and other members of the committee. Thank you for
giving me the opportunity to appear before you today. I
appreciate having this opportunity to discuss the Federal
Reserve Bank of New York's involvement with AIG.
At the outset, it is important to note that before the New
York Fed became involved with AIG as a lender on September 16,
2008, the Federal Reserve lacked any kind of authority to
oversee AIG. The lack of effective, consolidated supervision
over AIG was a critical contributing factor to the debacle that
occurred at the company.
The Federal Reserve made its decision to lend based on a
judgment that a failure of AIG would cause dramatically
negative consequences for the financial system and the economy,
consequences worse than what occurred in the aftermath of the
failure of Lehman Brothers. We stand by that judgment today.
In the case of Lehman, some of the most severe
repercussions related to the difficulties in coordinating
crossborder insolvency regimes and in coordinating the
insolvency regimes among different types of institutions within
the organization's corporate structure. In light of AIG's
unparalleled global footprint, operating in more than 130
countries around the globe, the multiplicity of different types
of financial service entities within its structure--including
insurance providers, foreign banks, consumer lending companies,
and over-the-counter derivatives affiliates--the factors that
proved unmanageable in the Lehman insolvency threatened to be
much more severe in AIG's case.
The fact that no effective emergency resolution procedures
exist under U.S. law to reconcile these difficulties heightened
the need for quick, effective action by the Federal Reserve in
consultation with and supported by the U.S. Treasury.
From the outset, the New York Fed has been sharply focused
on addressing two overarching goals with respect to AIG: one,
the stabilization of the company so that it no longer poses a
disruptive threat to our financial system and the economy; and
two, obtaining full repayment of government funds that had been
extended to AIG.
In light of the exceptional size and scope of AIG's
operation, with over 110,000 employees in more than 130
countries, spanning hundreds of legal entities, it was clear
from the beginning that the New York Fed, which has never been
engaged in any regulatory oversight of this company, was not in
a position to exert day-to-day management control over it.
Rather, the New York Fed's actions have consistently been
directed at securing its objectives as lender. As any lender in
our position would do, the New York Fed has put into place a
loan agreement that contains covenants designed to help ensure
ultimate repayment of the loan. But these creditor rights do
not create an ability on our part to manage AIG. Responsibility
for AIG's day-to-day affairs continues to rest with AIG's chief
executive officer, Edward Liddy, under the oversight of AIG's
board of directors.
Mr. Liddy, who has only become involved with AIG in a
public-spirited attempt to resolve its troubled affairs, has
made strides in dealing with AIG's opaque corporate structure,
lack of centralized controls, and complex risk exposures, but
much remains to be done.
In light of the inherent conflicts that would arise from
either the U.S. Government or the Federal Reserve exerting
ownership control over the world's largest insurer, the Federal
Reserve, with support of the Treasury Department, directed in
the loan agreement that an approximately 77.9 percent equity
interest in AIG would be issued to an independent trust
established for the sole benefit of the U.S. Treasury.
The trust, which now holds that controlling equity
interest, is overseen by three independent trustees, who are of
the highest integrity and who have considerable experience
leading major companies. These trustees have a legally binding
obligation to exercise all their rights as majority owner of
AIG in the best interest of the U.S. taxpayer, with the
proceeds of any ultimate sale of shares going directly to the
Treasury of the United States.
As has been widely noted, the activities of AIG's Financial
Products group were a principal cause of the losses that drove
AIG to the brink of bankruptcy in September 2008. Risks of
substantial magnitude, including derivative positions with a
current total notional value exceeding $1 trillion, still
remain in force at FP, meaning that not millions, but billions
of taxpayer dollars are potentially at stake today as the
orderly wind-down of FP continues to progress. The winding down
of these risk positions at FP is a delicate and complex matter
with systemic implications for the U.S. and global economy. Our
oversight of this risk-reduction process remains a top
priority.
With respect to the retention awards owed to FP employees
under their preexisting contracts, we believe that Mr. Liddy
weighed a number of factors in deciding not to attempt to
prevent payment. These include: the likely negative effects of
disruption in staffing at FP in managing its multi-billion-
dollar exposures; legal advice that the contracts were valid,
meaning that breaking them would likely increase the amount of
company funds ultimately paid to the cover employees; and the
negative consequence to AIG's business that could result from
public abrogation of these contracts.
In conducting our oversight as lender, the New York Fed did
not see any reason to disagree with Mr. Liddy's judgment from a
risk perspective. Equally important, we did not think it was
legally permissible or within the proper role of the New York
Fed to attempt to substitute our judgment for that of Mr.
Liddy's in this circumstance, even though we found the payment
of these retention awards extremely distasteful.
The broad public disapproval of sizable retention payments
being directed towards the unit most responsible for last
fall's downfall of AIG is understandable. Americans naturally
feel outrage when confronted with news of such payments to an
entity that worsened the financial crisis and that is dependent
on taxpayer funds to stay out of bankruptcy court, where these
contracts would not have been fully honored. Moreover, the
payments occurred during a time when so many Americans are
struggling to find jobs, seeing their wages reduced, or
watching their retirement savings plummet as a result of a
crisis they had no hand in creating.
This feeling of outrage underscores the urgent need to
reform the system of compensation at our financial institutions
in order to more closely align the incentives of executives,
owners, and taxpayers. Congress saw fit to impose appropriate
compensation restrictions on recipients of Troubled Assest
Relief Program funding. We think it is crucial for Congress and
the U.S. Department of the Treasury to continue to craft
effective and sensible policies in this area.
Although oversight of TARP-related compensation matters
rests with the Treasury Department, the New York Fed has played
a role since September in reviewing the adequacy of AIG's
corporate governance procedures. This review has helped to
identify longstanding deficiencies with respect to compensation
committee governance, compensation benchmarking, and a lack of
a centralized control over compensation policy. We will
continue to work with our colleagues at Treasury and the
independent trustees to ensure that AIG's management properly
addresses these deficiencies.
The total package of assistance that the Federal Reserve
and Treasury Department have committed to AIG has established a
more durable capital structure for the company that gives AIG
greater time and flexibility to execute its assets disposition
plans to repay government funds. Notably, we have recently
agreed in principle to accept preferred interest in two of
AIG's large, foreign life insurance subsidiaries, AIA and
ALICO, in order to make repayment of our loan less dependent on
forced divestitures into what is now a depressed acquisition
market. Although it will take time, we still expect that the
proceeds from asset sales should enable AIG to repay the New
York Fed in full.
In all that we have done, we have been motivated by two
goals: one, to preserve the stability of the U.S. economy; and,
two, to protect the U.S. taxpayer. The threat of a major
systemic risk event has been averted by honoring all of AIG's
contractual obligations around the globe, from insurance policy
obligations owed to individuals, municipalities, and businesses
across the United States, to the posting of collateral under
credit default swap arrangements with the full range of
counterparties that has been recently disclosed. As
unattractive as certain aspects of this treatment may be, these
negative aspects have followed unavoidably from the decision to
avert a systemically disruptive bankruptcy.
I look forward to your questions today and, in the longer
term, to working with you and your staffs on the broader public
policy questions, such as a formulation of a resolution regime
for institutions like AIG and consideration of the appropriate
supervisory structure for OTC derivatives that are posed by
events at AIG.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Dudley can be found on page
77 of the appendix.]
The Chairman. As I was saying, I want to begin with Mr.
Bernanke, but first an announcement--stop the clock, please--
that is going to be very important. Restart the clock, please,
when I am through with this.
We have a lot of members here; it is a very important
hearing. I wish we didn't have the 5-minute rule, and I wish we
didn't have so many members, and I wish I could lose weight
without dieting. In the absence of the reality of any of those,
the following will happen:
At the conclusion of each member's 5 minutes, whomever is
speaking will be allowed to finish the sentence, and then that
will be it, and they will have to not have too many dependent
clauses. Members should understand that. If they want answers
to questions, leave time for the answers. It simply isn't fair
to the more junior members for us to abuse the 5-minute
principle. So that will happen. I will probably also gain
weight, since we are talking about what will happen.
Now I will begin with my 5 minutes.
Mr. Bernanke, again, I think it is important to remember--
because I think an unfortunate partisan effort has slipped in
here--that this is a decision made by yourself, I presume in
consultation with the Secretary of the Treasury, last
September, and it was not one that required any congressional
involvement. That came a couple of days later with the TARP.
When you made the decision to intervene, to deal with the
creditors of AIG, was that in consultation with Secretary of
the Treasury Paulson?
Mr. Bernanke. It was in full consultation with the
Secretary and full agreement with the Secretary. And we both
came in and informed--obviously we did not get approval--but we
did inform in advance of this final decision a large number of
Members of Congress.
The Chairman. No, I remember, I was one of those. And I
remember the Secretary and you were there, and he was fully in
support of this. I do remember raising, myself, the question of
why there was no foreign participation, since one of the
arguments that we were given for the need for this was to
maintain foreign confidence. And I certainly don't shrug that
off. People who thought we could take that for granted, I
think, got a little bit of a start from the Prime Minister of
China on that subject. But it is important that this was fully
supported by the Secretary of the Treasury acting for the
President. And when you came up and informed us, that was
clearly the case.
Let me now ask, on the question of compensation, Mr.
Dudley, you talked about the need to reform compensation. I
assume you were talking about reforms that go beyond recipients
of capital funds under the TARP, is that correct?
Mr. Dudley. That is correct. We have looked at the
compensation governance arrangements at AIG, and we have put
considerable pressure on the company to improve those corporate
governances.
The Chairman. Well, I understand. But are you talking about
outside of the context of people who receive funding?
Mr. Dudley. Pardon me?
The Chairman. When you talk about the need to improve
compensation, I thought you were talking about more than just
AIG.
Mr. Dudley. No, this is with respect to AIG.
The Chairman. Just with AIG.
But, Mr. Bernanke, you talked about compensation in the
broader context. Would you elaborate?
Mr. Bernanke. Yes, sir, I have. I do think it is very
important that compensation that links performance and reward
appropriately and, in particular, does so in a way that does
not incentivize excessive risk-taking, that makes sure that we
don't get short-term compensation for long-term outcomes, and
that in general is more consistent with both appropriate
proportionality but also with maintaining the appropriate
incentives for safe and sound behavior. And that was missing in
AIG.
The Chairman. And you think that should be done across-the-
board with large financial institutions, whether or not they
are receiving Federal monies.
Mr. Bernanke. Yes, sir, I do. We have already undertaken
that through the supervisory process.
The Chairman. So you think that lessens the possibility
that people will get into trouble?
Mr. Bernanke. It is an important issue for avoiding a
future systemic crisis.
The Chairman. Well, I appreciate that, because, in 2006 and
2007, I was involved with legislation. We had a hearing on it
in 2006, when my Republican colleagues were in the Majority,
and we petitioned under the rules for a hearing. And then, in
2007, we brought forward legislation dealing with executive
compensation, at that point more of a restraint on pay. And it
became a very partisan issue.
So I do want to say we are probably going to revisit this.
We ran into a great deal of opposition. And it is apparently
something that divides the parties. There is a considerable
view, particularly on the Republican side, that we should not
intervene at all in the questions of compensation, unless we
are talking about people getting Federal money. We all agree
that is a different category.
I was pleased to hear you say what you said, because it
does seem to me that--and we are not talking now about the
amount of compensation, although you do mention
proportionality, but the incentive structure of the
compensation; that compensation which incentivizes top
decisionmakers to take risks unduly adds to the risk in the
system.
I solicited that comment because that is one of the things
we will be returning to. And there will be a debate this year
in the Congress, as part of our effort to diminish systemic
risk, on whether or not the structure, the incentive structure,
of compensation be included. As I said, the last time that came
up, there was a partisan debate. I hope there is a less
partisan debate the next time.
Now, on the resolution authority, again, let me ask this
directly, Mr. Bernanke: If the resolution authority had existed
on September 1, 2008, would AIG have been handled differently?
Mr. Bernanke. Quite differently. It could have been taken
into receivership or conservatorship. This bonus issue would
not have arisen because all the contracts could have been
adjusted by the conservator. As necessary, we could have taken
haircuts against some of the counterparties without creating a
default or disorderly situation.
So it is very similar, as you pointed out, to the way the
FDIC would now handle an IndyMac, for example, and with some
disruption obviously but not nearly the consequences of a
failure, of a disorderly failure of a large insurance company.
The Chairman. Thank you.
The gentleman from Alabama.
Mr. Bachus. Thank you.
Secretary Geithner, on September 14th, you and Secretary
Paulson met with AIG to discuss Lehman's failure and their
worsening condition?
Secretary Geithner. We had a series of meetings in the days
preceding the action by the Fed on the 16th--
Mr. Bachus. On the 16th, okay.
Secretary Geithner. --with AIG and a range of other
financial institutions. As the chairman said, you know, the
world is going through a--
Mr. Bachus. Yes, I understand that. But you met with him.
And, as a result of those meetings, there was a government
intervention supervised and coordinated and led by the New York
Fed. And you were president of the New York Fed.
Secretary Geithner. I was president of the New York Fed.
Mr. Bachus. On September 16th, the government became the
79.9 percent owner of AIG. Is that correct?
Secretary Geithner. That is correct.
Mr. Bachus. Then there was an $85 billion government
guarantee that went to AIG, or funds. Is that correct?
Secretary Geithner. That is correct.
Mr. Bachus. Then, on October the 8th, a good amount of that
money was paid to the counterparties. Is that correct?
Secretary Geithner. Well, again, the purpose of the
intervention was to prevent default by AIG, because our
judgment was the consequence of default would have been
catastrophic to the American economy.
Mr. Bachus. Sure, I understand that.
Secretary Geithner. So AIG was able to, as a result of the
intervention, to meet a full range of its obligations as a
large, complex financial institution.
Mr. Bachus. Sure, I understand that. But what I am saying
is that you took over on September 16th, then on October the
8th, began to pay the counterparties off.
Secretary Geithner. Well, again, throughout that period of
time--and this was critically important to the stability of the
financial system--we wanted to make sure AIG was able to meet
its commitments.
Mr. Bachus. I understand that. To pensioners, to retirees,
to--
Secretary Geithner. Municipalities.
Mr. Bachus. Municipalities.
Secretary Geithner. Banks.
Mr. Bachus. But what I am saying is, within about 2 weeks,
these payments--or 3 weeks--payments were made to the
counterparty. I am not--
Secretary Geithner. Well, I think probably within hours,
technically, within minutes probably.
Mr. Bachus. All right, within hours.
There has been now a total somewhere over $50 billion worth
of these payments to counterparties. I am very interested in
that. I mean, these payments to counterparties, these were
parties that took a risk and entered into agreements with AIG,
were they not?
Secretary Geithner. Absolutely.
Mr. Bachus. Okay. And these were credit default swaps,
securities lending, things of that nature, which you can lose
money on.
Secretary Geithner. Well, any insurance contract written by
AIG poses a risk to the person who bought that insurance
contract.
Mr. Bachus. Sure. And a credit default swap is sort of a--I
guess you could call it a form of insurance. But what I am
saying is it was an agreement between two parties. And AIG
defaulted or was on the verge of defaulting.
Secretary Geithner. Well, AIG was on the verge of default.
So, again, any of the contracts AIG had with millions of people
who bought insurance from it--
Mr. Bachus. Well, I understand those people and those
contracts with people, you know, retired teachers, etc. But now
I am focusing on the counterparties. They were paid 100 percent
of everything AIG owed them. Is that correct?
Secretary Geithner. I am not sure if technically that is
right, but, again, the purpose of the intervention was--
Mr. Bachus. No, I am not talking about the purpose of the
intervention. I am--
Secretary Geithner. So the result of the intervention was
AIG was able to meet its obligations under--
Mr. Bachus. But what I am saying, Mr. Secretary, is that
AIG's counterparties were paid 100 cents on the dollar.
Secretary Geithner. The people who had contractual
obligations from AIG, from the person who bought an insurance
protection product or a basic insurance product, were paid--
Mr. Bachus. Well, we are not talking about insurance
policies here. I am talking about--
Secretary Geithner. No, but this is very important.
Mr. Bachus. I am talking about the foreign banks, Goldman
Sachs. They were paid 100 cents on the dollar, were they not?
Secretary Geithner. Again, that was the purpose and result
of--
Mr. Bachus. Well, I am not talking about whether--I am just
saying they were paid 100 percent of what they were owed.
Secretary Geithner. AIG was able to meet its commitments
and met its commitments.
Mr. Bachus. At 100 percent.
Secretary Geithner. It fully met its obligation, yes.
Mr. Bachus. Sure, fully met its obligation.
Well, my question to you--and I am not--was there any
discussion about a haircut, or 95 percent, taking 95 percent or
90 percent as full payment?
Secretary Geithner. We explored, at that time, every
possible means to reduce the drain on their resources,
including what you referred to. But, again, because we have no
legal mechanism in place for dealing with this like we deal
with the bank, we did not have the ability to selectively
impose losses on their counterparts.
Mr. Chairman. I am sorry. The gentleman has now exceeded 5
minutes. As I said before, the last person speaking during the
5 minutes will complete a sentence, and we will move on.
Mr. Geithner, do you want to complete the sentence?
Secretary Geithner. I have forgotten where I was in my
sentence, but--
The Chairman. Well, that is all right.
Then we will now go to Mr. Kanjorski. There are too many
members here for those of us in the top row to abuse the 5-
minute privilege.
The gentleman from Pennsylvania.
Mr. Kanjorski. Thank you very much, Mr. Chairman.
Mr. Geithner, it is interesting to note, just in the
questioning of the gentleman from Alabama, how we are not sure
of what happened, when, and under what circumstances.
Have you understood yet that the American people's reaction
last week to a large extent was due to the fact that they feel
that they are boxed out of knowing what is really going on in
this economic crisis, and they are not well-informed?
Secretary Geithner. Absolutely, Congressman. I think that
the American people are deeply frustrated and concerned and
angry and skeptical, frankly, that they understand what is
happening and whether taxpayers' moneys are being used wisely
to deal with this. I completely understand it, and it is a
completely reasonable reaction to the damage caused by this
crisis.
Mr. Kanjorski. Do you feel that ultimately the Federal
Reserve and yourself will have to come up to Congress and ask
for additional authority in a ``rescue II'' to replenish the
capital of some of these banks after we get rid of the asset
problem, and whether or not the activities of the last several
weeks and this lack of information as to what the problem is,
and what the potential solutions are, will cause grave question
as to whether or not the Congress will authorize further rescue
money?
Secretary Geithner. Of course, I understand that. I think
there are--it is clear that we are going to need to ask them.
We will ask for broader authority to deal with future AIGs.
That is in the interest of the country. We will do that.
Now in the President's budget, as you know, we have put in
a reserve fund against a contingency that to solve this crisis
adequately, we may need to come back to the Congress and ask
for additional resources. We have not made that judgment yet,
but I completely understand the scale of skepticism and the
public opposition to the provision of additional resources.
But our responsibility is to recommend to the Congress what
is necessary to help get the economy back on track, and if that
requires more resources, it will be our obligation to come to
you and make the case for that. But we recognize it is going to
be extraordinarily difficult, particularly in the wake of not
just the last 2 weeks, but the last 9 months, frankly.
Mr. Kanjorski. Well, that being the case, I assume that you
recognize that there is not an awful lot of sympathy up here to
necessarily provide additional funds, not going on the merits
of whether the funds are necessary. I, for one, am absolutely
convinced that for orderly process we need additional funding,
and probably will, as we did back in September and October,
vote in favor of that funding. But it is not going to be an
easy lift on behalf of the Congress.
In light of those facts, what are you designing or what are
you putting in place so that we could adequately inform the
American people as to what the real problems are and what the
potential solutions to those problems are so there are more
partners in this act that we are going through?
Secretary Geithner. That is a very important question.
Thanks for asking it.
Within the first weeks of taking office, we put in place a
set of clear commitments to put in the public domain the
precise terms of all the financial contracts that my
predecessor entered into and that we would enter in the future
that would provide taxpayer assistance to financial
institutions under the Emergency Economic Stabilization Act.
Because of that commitment, the American people will be able to
see, as I said, the precise terms for the first time of those
commitments.
In addition, we are going to require extensive reporting by
any recipient of TARP assistance to go into how they are going
to use those resources, what it is going to do to their lending
capacity, and what is actually happening to lending. We have
proposed very strong conditions on compensation, on dividends,
and a range of other things.
But I completely agree that the American people deserve to
see much higher standards for transparency and accountability
over the use of these resources, and they are understandably
skeptical that they are going to see enough benefit from these
resources, in part because of the decisions you have seen made
across the financial sector in the wake of Congress passing
that exceptional authority back in September.
Mr. Kanjorski. Would you call this putting together rules
of engagement that in the future, as you move down this track,
that you are--the people you are dealing with, the companies
you are bailing out, and also the American people will know the
rules of the road?
Secretary Geithner. I think that is a very important thing.
I mean, it is very important that the American people
understand we are going to devote these resources to things
that are going to get credit flowing again, get interest rates
down, and improve the access for businesses and consumers to
credit. That is the central obligation and purpose of this
authority.
And if you look at what we have done over the last several
weeks, you can see we have moved quickly to put in place very
substantial measures to address the housing crisis. You are
seeing the actions of the Fed and the Treasury together bring
down interest rates, allow Americans to refinance and take
advantage of lower interest rates. You have seen us move to put
in place very important new programs to help support small
business lending, to get lending flowing again across the
financial system as a whole. Those are very important things.
But as part of that, we need better clarity on the rules of the
game going forward. I completely agree.
Mr. Kanjorski. Thank you very much.
The Chairman. Mr. Garrett.
Mr. Garrett. Thank you, Mr. Chairman.
Mr. Chairman, I appreciate your opening response to the
chairman with regard to your first involvement with the
bailout, saying that it was in consultation with Treasury, but
also, if I heard you correctly, also in consultation but not
with the approval of the chairman of this committee as well; is
that correct?
Mr. Bernanke. Secretary Paulson and I informed a large
group of congressional leaders about the issue, and also the
President, prior to the final signing of the agreement.
Mr. Garrett. Did the chairman or anyone else ask the
question at that time whether or not bonuses or pay or anything
else should be considered at that point in time?
Mr. Bernanke. I don't recall any discussion of bonus or
pay.
Mr. Garrett. Thank you.
Mr. Geithner, I really do appreciate sincerely your opening
comment--one of your comments with regard to Mr. Liddy and
saying that some of the comments about him were over the top,
and some of the vitriolic comments coming out of this
committee, as well, were certainly over the top. I appreciate
very much the fact that we are not going to get people like him
to come in under circumstances like this. And I also appreciate
the fact that, with all due respect, you are having a difficult
time in the Treasury as far as filling all the spots that you
need.
I think it is difficult, with that sort of action going on
in Congress, for you to be able to do that. And I think it is
also difficult for all of you to get your job done in light of
what was done in Congress last week imposing impediments, if
you will, in the legislation that we passed as far as
accomplishing what you need to accomplish.
With all that said, I appreciate that.
Mr. Chairman, going back to your comments, you knew about
this to some extent, and you elaborate on page 5 of your
testimony, which I think is very insightful, as far as the
litany of your involvement and who you are looking at on the
loss side and what have you. There was a filing with the SEC at
the beginning of September at that time which laid out of some
that information. I presume both of you, Mr. Geithner is
nodding, and Mr. Bernanke, I presume you knew as well, saying
at that time as far as the compensation packages that were out
there that would have to be considered, I presume that one or
both of you knew about that filing at that period of time, at
least laying out the information? Yes or no?
Mr. Bernanke. Congressman, I knew that there were general
compensation packages throughout the company. I did not know, I
was not informed about the specific payments to AIG FP.
Mr. Garrett. If you had that information, would that have
been germane to your discussion of this?
Mr. Bernanke. It would have given us more time to talk,
negotiate, and look for options, but, frankly, we still would
have faced the same legal obstacles that we are currently
facing.
Mr. Garrett. Likewise, Mr. Geithner.
Secretary Geithner. May I just say something? This is
hugely important.
Mr. Garrett. Sure.
Secretary Geithner. A huge amount of information was
available in the public domain. We knew from the beginning that
we had a mess on our hands, a very complicated mess we were
going to have to work through. We were spending every minute,
every molecule of oxygen to contain this fire.
Mr. Garrett. I appreciate that. I only have 5 minutes, but
let me finish the question.
Secretary Geithner. But on the specific question you
asked--
The Chairman. The gentleman from New Jersey has the time.
Remember he has the time.
Mr. Garrett. If I go around again, I will let you elaborate
on that.
The Chairman. In your dreams.
Mr. Garrett. And I do dream about this stuff, oddly enough.
The Chairman. I yield the gentleman an additional 10
seconds, please.
Mr. Garrett. While some of this was in the public domain,
clearly Congress was not thinking about this during that period
of time. Was it in the consideration of either one of during
that period of time, while you were discussing it--I do
appreciate the fact how you were discussing it and weighing all
the legal considerations, what have you--was not conveyed to
Congress in a formal manner, one way, shape, or form? Was that
ever considered that you would discuss it with Congress, both
of you?
Mr. Bernanke. Congressman, one mechanism is congressional
letters, and, as you know, we have received a large number of
letters. We have responded in great detail, not often as
quickly as we should have, and I apologize for that. But we
have provided lots of information about governance, about
compensation and other issues through that mechanism. Also, we
report on the financial issue.
Mr. Garrett. Well, to be candid with you, I don't remember
any letters from September on between that time and now, or
just a few weeks ago, discussing these particular issues, as
far as compensation and the bonuses, what have you.
Was it ever your consideration, either one of you, at that
period of time that if this information was discussed more
publicly, that Congress may be hesitant about going forward
with their voting in favor of the additional TARP monies? That
was never a discussion, never an issue?
Mr. Bernanke. As I said, I was not aware of the specific
set of payments until basically the same day, the 10th of
March, I believe it was.
Mr. Garrett. Right, but between that time forward, we have
not been advised of this on the committee in a formal matter.
We have? You are shaking your head yes.
Secretary Geithner. You are saying from March 10th forward?
Mr. Garrett. From March 10th, we were.
Finally, we only have about 15 seconds left. With regard to
the disorderly--or the not disorderly, but the orderly winding
down of AIG, what can you tell us in about 15 seconds? If there
are no prospects of parties out there to pick up the good
assets of AIG, what are the prospects of additional taxpayers'
dollars having to go into AIG to prop it up for a continued
length or period of time while you continue to wind it down?
Mr. Bernanke. It is going to depend very much on how the
economy evolves and asset markets evolve, but contrary to what
has been alleged, we have a very substantial and detailed plan
for the unwinding, which involves selling off noncore assets
and winding down the risky parts of the company.
The Chairman. The gentleman's time has expired.
The gentlewoman from California. I ask her for 15 seconds
to respond.
The gentleman from New Jersey raised some questions about
what I was told. We were told, not asked, but told that they
were going to make this loan. I did, without a lot of time to
react, raise one question, which is why there was not an effort
to get foreign participation. I was told by Mr. Paulson and Mr.
Bernanke that they did not think that was possible.
Two days later, we were asked by the same two gentleman to
do the TARP money. At that point, at that meeting, I did raise
questions of compensation and continue to make that a high
priority.
The other thing I would say, I do notice, again, it seems
to me, an unfortunate partisan tint. I was there at the same
time as the ranking member. We were both there. We were both
informed at the same time. We were not given any indication
that our input was going to have any impact on what happened.
The gentlewoman from California. I appreciate her yielding
to me.
Ms. Waters. I would like to ask Mr. Geithner about the way
that they have arranged to do the asset management for the new
program that had been rolled out. You mentioned that there are
five fund managers to manage the program for Treasury, and you
set out the qualifications. Who will these five fund managers
be?
Secretary Geithner. We don't know yet. We have to see who
applies.
Ms. Waters. Is it possible Goldman Sachs could be one of
them?
Secretary Geithner. It is possible. If they are qualified,
we would consider them--
Ms. Waters. Were they included in one of the managers--when
Mr. Paulson first rolled out the asset management program,
before he pulled it back, was Goldman Sachs one of those five?
Secretary Geithner. I don't know, but I would be happy to
go back and check.
Ms. Waters. I will check it.
Let me tell you why I asked that. You hear a lot about the
dissatisfaction about the bonuses, etc., but underneath all of
this is a conversation about the linkages and the connections
of the small group of Wall Street types that are making
decisions. And I just want to ask you, because you may be able
to clear some of this up, it is true that Goldman Sachs
received money from AIG; is that right?
Secretary Geithner. That is true.
Ms. Waters. How much was that?
Secretary Geithner. I don't have--I don't know exactly, but
I would be happy to make sure--
Ms. Waters. Okay, we will find out.
And also, they received money from the TARP Program,
Goldman Sachs; is that right?
Secretary Geithner. That is correct.
Ms. Waters. And Goldman Sachs is where Mr. Paulson really
spent some time of his career, right?
Secretary Geithner. Absolutely.
Ms. Waters. Your CEO that you hired to work with you is
from Goldman Sachs also?
Secretary Geithner. My CEO.
Ms. Waters. Well, whomever works for you. I don't want to
get the nuances to the point where we misunderstand each other.
Do you have--your chief of staff, is your chief of staff from
Goldman Sachs?
Secretary Geithner. My chief of staff, who is an honorable
person--
Ms. Waters. Just tell--
Secretary Geithner. But, Congresswoman, my chief of staff
did spend a brief period of time working in the past for
Goldman Sachs, that is correct.
Ms. Waters. Okay. That is all I want to know.
Then I want to know, was Goldman Sachs involved with the
decision that was made that weekend before they came to the
Congress--
Secretary Geithner. No.
Ms. Waters. --to ask for money on the sale of Bear Stearns?
Secretary Geithner. No.
Ms. Waters. Was anybody from Goldman Sachs involved in that
discussion that weekend?
Secretary Geithner. Well, let me go back on this. At the
time when Bear Stearns was on the brink of default, and the
Federal Reserve then acted to try to avoid default, there were
a range of institutions that considered buying and assuming the
obligations of Bear Stearns.
Ms. Waters. I really wish I had time for you to go into it,
but Goldman Sachs was involved in some way in that decision
based on whether or not they were considering the purchase
themselves or they were advising about it; is that correct?
Secretary Geithner. No, not in the decision and not
advising us.
Ms. Waters. In some way.
Secretary Geithner. Certainly not advising us, no.
Ms. Waters. Well, in some way. In some way, they were
involved.
Secretary Geithner. Well, there were a whole range of
institutions that Bear Stearns approached--
Ms. Waters. Were they also involved in the decision not to
support Lehman Brothers?
Secretary Geithner. No.
Ms. Waters. In no way?
Secretary Geithner. No.
Ms. Waters. All right.
Secretary Geithner. Those are decisions made by your
government.
Ms. Waters. I am just asking the questions, because the
talk is, underneath what you may not know about, is this small
group of decisionmakers at the center of it is Goldman Sachs,
and that is what is causing a lot of the distrust, because
people are thinking or believing that Goldman Sachs, because of
the connections, have had a lot to do with the decisions that
are being made.
Now, on the big fund, is there some reason why you only
have to have 5 managers involved in this fund, with at least
$500 million in private capital? This eliminates a lot of firms
being involved, and we believe that Goldman Sachs will again be
one of those who will be the beneficiary.
Secretary Geithner. Well, as I said, we are going to run an
open, competitive process so that the taxpayers of the United
States enjoy the best type of expertise in managing these
funds. And there are some obvious practical concerns about why
we can only have a limited number to do it.
But can I just come back to your basic premise,
Congresswoman? Of course I am aware of this concern. I think it
is deeply unfair to people who are party to these decisions to
suggest they were making judgments that in their view were not
in the best interests of the American people. But I understand
that concern. I understand that concern.
The Chairman. The gentleman from New York, Mr. King.
Mr. King. Thank you, gentlemen. I thank each of you
gentlemen for your testimony today.
Secretary Geithner, I would like to follow-up on some of
the questions by Congressman Kanjorski, and I would like to
address the AIG bonus issue in the context of lessons learned
and how what occurred with AIG would impact the toxic asset
plan which you announced yesterday, because for that plan to
succeed, there must be cooperation between the government and
the private sector. There must be trust, and there must be
assurance that rules are in place, and the rules won't be
changed in the middle of the game.
Now, based on your experience with AIG, as painful as that
may have been over the last several weeks or months, what can
you do to assure the private sector that if they do
participate, and they are profitable, and for whatever reason,
justified or not, there is a public outcry, and we see the type
of hysteria and hyperbole and histrionics, hyperventilating and
conspiracy theories and retaliatory legislation that we saw
last week, that these private institutions will not have their
profits confiscated?
I am speaking now specifically especially of marginal
institutions who may be deciding whether or not to participate.
I also ask in the context of your testimony today and
recent comments regarding excessive compensation. Now, if the
government gets involved in setting compensation, that is going
too far. If you are setting standards, could that be too vague?
And would private institutions, will they have--will they be
protected from their compensation being subjected to ex post
facto moralizing and judgments?
Secretary Geithner. Those are thoughtful questions. Let me
just go quickly through them.
Mr. King. Sure, take your time.
Secretary Geithner. I think it is absolutely right that we
are not going to get through this financial crisis unless this
system is willing to take risks, unless banks and private
investors are able and willing to take risks again. That does
require some confidence and clarity about the rules of the game
going forward, and I think it is an important obligation we
share with the Congress to try to make sure we are providing
Congress with that level of competence and clarity.
Also important, though, is to make sure that we reassure
the American people that the taxpayers' money is not going to
go to reward failure and to encourage excessive risk-taking in
the future.
Mr. King. Well, if I could just interrupt here a second,
obviously all of us agree the AIG bonuses were wrong. But how
do we protect against that without going too far?
Secretary Geithner. It is a difficult judgment. As the
chairman said in response to a previous question, the choices
we faced were very constrained by the fact these were legal
contracts, and we are a nation of laws, and we have to be very
careful about the circumstance in which we raise questions
about the government intervening with respect to legally valid
contracts.
But we do have an obligation now to go back and try to
recoup those payments, and we are going to do that carefully
and explore legal avenues in that context.
Now, looking forward, I do think it is important for the
country to put in place strong standards that govern
compensation practices across the financial community as a
whole, because, as we have seen, those can have systemic
consequences, creating a more fragile and unstable system.
You are right, it is a difficult balance. The government
should not be setting detailed or prescribing detailed
regulations to govern amounts of compensation and their
distribution. We have to hold to broad standards that again
make sure that we are not encouraging short-term risk-taking at
the expense of long-term stability.
And here is one other example. You want to make sure that
people responsible for running the checks and balances in these
firms, for running risk management, for doing the audit
process, those people, too, are compensated adequately so you
attract strong talent to run the checks and balances that our
system depends on.
Mr. King. What is the timeline as to when you expect to
have these guidelines in place and your legacy asset plan goes
forward?
Secretary Geithner. Our immediate priority is to lay out
guidelines to apply the new legislative requirements on
compensation that were passed as part of the American Recovery
and Reinvestment Act, but we are going to move quickly, we
hope, to lay out broad standards that help govern compensation
practices in the future, beyond those that would apply to
institutions that receive taxpayer assistance.
Mr. King. On the legacy asset--toxic asset plan, do you
intend to implement changes in mark to marketing?
Secretary Geithner. As you know, I believe the SEC, or the
relevant legal authority, has put out for comment some
important new clarifications to the fair-value accounting
regime.
Mr. King. What would Treasury's opinion be on that?
Secretary Geithner. I want to be careful on how I respond
to that, but I will give you my initial reaction, which is they
are a constructive set of changes. They provide a right balance
between preserving confidence in the quality of public
disclosure, which is very important to getting through this,
but still address some of the complications of applying those
experiences in a market like we are experiencing today.
Mr. King. Thank you, Mr. Secretary.
The Chairman. The gentlewoman from New York, Mrs. Maloney.
Mrs. Maloney. Thank you, and I thank all of the panelists.
I received a report from AIG that they presented to our
government during this critical time where they outlined the
need for a bailout. They claimed that they were America's
largest insurance company, and if they failed, the entire
economy would fail. They more or less put a gun to our heads
and said, if you don't bail us out, the economy will fail.
I would put it another way. If we bail out firms every time
someone says it, our economy will collapse.
And since I have their detailed explanation, I would like
to request from the Federal Reserve, Treasury, and the New York
Fed the analysis that the government did that AIG needed to be
saved. I would like to study that and also request the analysis
that was made that Lehman should fail. I think the opportunity
we have now is to study what happened so that we can make
better decisions going forward.
So, Mr. Bernanke, does such a document exist, and could we
receive copies of both the Lehman analysis and the AIG analysis
from the government? Surely we did not just take AIG's
analysis--
Mr. Bernanke. We certainly did not take AIG's analysis. We
have done our own analysis and had substantial discussions
about the systemic risks associated with AIG. We will find what
we have and try to provide it for you.
On Lehman, we did not choose to let it fail; it failed
because we could find no solution. But our strong preference
would have been to avoid failure, because we have seen the
consequences of the failure.
Mrs. Maloney. And, likewise, AIG came back several times
for more money, and at each point we could have put
restrictions on the executive compensation or management, or a
number of ways. Each time they came back, we could have
analyzed the systemic risk more, and I would like to request
the documentation that was done during those three periods that
they came back for more money.
Mr. Bernanke. We did impose considerable restrictions on
executive compensation and the process for setting it. So did
the TARP, when that became part of it.
The problem with the AIG FP bonuses was they were set by a
contractual agreement prior to the government taking over the
firm.
Mrs. Maloney. Well, contracts can be changed. We change
contracts all the time. Contracts are being renegotiated now
with General Motors and with mortgage, housing, and all kinds
of places, so they can be changed.
But when we saw the counterparties, it included one firm
that has publicly said that they could have managed the default
of AIG and been whole, so clearly there was no systemic risk
with that company and possibly with others. I am sure you are
aware of those public statements.
And, also, when you looked at the counterparties, there
were municipal governments. Do you consider municipalities
systemic risk?
Mr. Bernanke. As I discussed in some detail in my
testimony, the systemic risk goes well beyond specific
counterparties. In the case of the company you are referring
to, perhaps they were hedged, but then it means that some other
party that hedged them would have lost. But more important than
the specific losses associated with the counterparties would be
the loss of the confidence in the system as a whole and the
likelihood that we would have seen a run on banks, given that
markets would not know ultimately who was exposed to AIG.
Mrs. Maloney. And, likewise, it had counterparties that
were a number of foreign banks. Do you consider bailing out
foreign banks systemic risks to the American economy?
Mr. Bernanke. I think it is essential that AIG meet its
obligations. Otherwise it would have created substantial
problems, yes.
Secretary Geithner. Congresswoman, could I add to that?
Mrs. Maloney. Yes.
Secretary Geithner. We did not act because AIG asked for
assistance. We did not act to protect the individual
counterparties from the consequences of their defaults. We did
not act to help foreign banks.
We acted because, in our judgment, the consequences of a
default for the American people would have been catastrophic in
ways that go directly to the value of their pension plans, and
their capacity to borrow.
If you look at what happened across the source of the fall,
you can see concrete evidence of exactly what would have
happened in the wake of a failure of AIG.
It is very important to understand this. I don't believe
there is any plausible argument that AIG was not systemic then,
or that its failure today would not be systemic. I think all
the judgments that went into that very difficult judgment in
September still apply today.
And our obligation, the three of us here today, is to do
what we believe is in the interest of, using the authority you
have given us, to protect the American economy from the kind of
catastrophic damage that could come with default by a major
institution like this.
Mrs. Maloney. Reclaiming my time, basically, could the
systemic risk have been contained at a much lower cost, Mr.
Bernanke? Obviously--
The Chairman. The Chair was distracted. The gentlewoman
completed her sentence. The time has expired.
The gentlewoman from Minnesota.
Mrs. Bachmann. Mr. Chairman, thank you for this
opportunity. These truly are extraordinary times in our
financial services sector since 1 year ago the Federal Reserve
opened the Fed's discount window in the amount of $29 billion
for Bear Stearns.
The American people are looking at the actions of both the
Federal Reserve and the Treasury Secretary, and they are
wondering if their government is making an historic shift,
jettisoning the free-market capitalism in favor of centralized
government economic planning.
I wonder, Mr. Secretary, if you would comment on that.
Secretary Geithner. I do not believe that concern is
justified. I understand why people would be worried about this.
But what we are doing is using the authority the Congress gave
us, authority that was designed to help protect the American
economy from these--
Mrs. Bachmann. Reclaiming my time, Mr. Secretary. What
provision in the Constitution could you point to to give
authority for the actions that have been taken by the Treasury
since March of 2008?
Secretary Geithner. Oh, well, the Congress legislated, in
the Emergency Economic Stabilization Act, a range of very
important new authorities.
Mrs. Bachmann. Sir, in the Constitution. What in the
Constitution could you point to, to give authority to the
Treasury for the extraordinary actions that have been taken?
Secretary Geithner. Every action that the Treasury and the
Fed and the FDIC has been using authority granted by this body,
by the Congress.
Mrs. Bachmann. And in the Constitution, what could you
point to?
Secretary Geithner. Under the laws of the land, of course.
Mrs. Bachmann. And if I could move to the Federal Reserve
Chair, if you could point to what provision in the Constitution
would give authority to the Federal Reserve? This has been over
$10 trillion that we are talking about.
Mr. Bernanke. I don't know where $10 trillion comes from.
The Congress has the right to authorize funds, which is what
they did in the TARP Program. And in the 1930's, they gave the
Federal Reserve the power for emergency lending as a means for
addressing financial crises, which is what we have done.
Mrs. Bachmann. And for the Federal Reserve Chair, do you
believe there are any limits on the authorities that the
Federal Reserve has taken since last March of 2008?
Mr. Bernanke. The loans we make have to be fully secured
and collateralized. We have practical limits in terms of our
ability to manage monetary policy. So there are, obviously,
limits.
We have reported extensively to the Congress on all the
actions that we have taken, and the actions we have taken have
been solely and entirely for the purpose of protecting the
American economy from the effects of financial collapse.
Mrs. Bachmann. We have seen both China and Kazakhstan make
calls for an international monetary conversion to an
international monetary standard as soon as the G-20, and I am
wondering, would you categorically renounce the United States
moving away from the dollar and going to a global currency, as
suggested this morning by China and also by Russia?
Mr. Secretary?
Secretary Geithner. I would, yes.
Mrs. Bachmann. You would, categorically?
And the Federal Reserve Chair?
Mr. Bernanke. I would also.
Mrs. Bachmann. Could you tell me why AIG was not put into
receivership as opposed to conservatorship?
Mr. Secretary.
Secretary Geithner. Again, no legal means existed under
U.S. law to resolve AIG using the kind of powers available to
the FDIC to resolve a bank. Because of the absence of
authority, your government was faced with no good options, and
we chose the best option available at the time to help protect
the economy from systemic damage. If we had different
authority, we would have had different choices.
Mrs. Bachmann. And to the Federal Reserve Chair, the
Federal Reserve has denied giving information to the American
people about the overnight loans that are made to the companies
in terms of the bailout. Bloomberg had initiated a lawsuit, and
the Federal Reserve has rejected. Twenty Members of this
Congress have written a letter to the Federal Reserve asking
that the American people be given the information about which
banks made the loans, what the collateralization is.
Can you tell me why the Federal Reserve does not want the
American people to know who these loans are made to on an
overnight basis?
Mr. Bernanke. First of all, it has nothing to do with the
bailout. This is short-term lending done by the Federal Reserve
to banks, as has been done by central banks around the world
for hundreds of years. The purpose is to provide short-term
liquidity to these banks.
Hundreds of banks, both large and small, come to the
discount window. They provide collateral for their loans. We
have never lost a penny on this program.
Mrs. Bachmann. Mr. Chairman, why would the American people
be disadvantaged for knowing this information?
Mr. Bernanke. They would not be disadvantaged necessarily--
well, they would in the following sense: the concern is that if
banks were revealed to be borrowing and others were not,
inference might be drawn that they were in weaker condition
than they, in fact, might be.
The problem is what is called stigma, so that if banks are
being perceived as weaker, if they have to come to the Fed,
then others might not wish to deal with them, and they might
not come to the Fed.
In fact, that was the problem we had at the beginning of
this episode, that no one wanted to come borrow, even though it
was clear that the banking system needed to get liquidity from
us. So we have tried to make sure that their information is
protected so they will, in fact, come and take the liquidity
they need--
Mrs. Bachmann. Mr. Secretary, as I understand it,
approximately 90 to 95 percent in the new program that you have
just announced yesterday of the funding would come from the
taxpayers; is that true? Or perhaps the leveraging is a 6 to 7-
to-1 leveraging on the purchasing of the public-private
partnership, the toxics assets that are available.
When the returns come back to the American people, will the
American people be receiving 90 to 95 percent of the benefit,
or will it be another figure?
The Chairman. The gentlewoman's time has expired.
Mrs. Bachmann. Mr. Chairman, could I have an answer from
the--
The Chairman. No. As I explained, members control the time.
You cannot extend your time into somebody else's time and then
get an answer. As I said, the person speaking at the expiration
of the time will be the last person speaking.
You cannot--if members use their time to extend the
discussion, then members lower down will not get a chance to
question. When the time expires, the person speaking will be
the last person speaking.
The gentlewoman from New York.
Ms. Velazquez. Thank you, Mr. Chairman.
Mr. Bernanke, in September when you established the credit
facilities for AIG, what sort of specific restriction did the
Fed impose at that time on compensation to AIG management and
employees?
Mr. Bernanke. Well, President Dudley might be able to help
me, but first of all, we replaced the CEO and other top
management. We imposed very tough restrictions on the pay to
the top executives. In fact, three of the top executives are
working for zero or $1 a year right now.
Then when the TARP money came in, the strictest terms of
the TARP compensation restrictions were imposed, and, in
addition, the company agreed to go well beyond the legal
requirements imposed by the TARP law.
So, throughout the top executive ranges, there have been
very substantial restrictions on compensation.
Bill, did you have anything else there?
Mr. Dudley. In addition to that, we have worked on the
governance of the compensation structure at AIG to basically
firm it up so that they do a better job in terms of
coordinating how compensation is done throughout the company.
AIG is a company with a very weak core and lots of big business
units spread all over the world. And so compensation was not
done on a consistent basis across the company, and we are
working to improve that with AIG.
Ms. Velazquez. So if you imposed all those restrictions,
how can you explain the types of bonuses that were provided by
AIG?
Mr. Bernanke. Those restrictions, as have been the case in
most of the TARP activities, for example, apply to the top
management of the firm. These were not bonuses at the top
management of the firm. They were bonuses to individuals
working in the AIG FP division. They were highly compensated
because they were using very complex financial derivatives and
applying their knowledge.
But, and, again, as we have discussed, the contracts were
signed prior to the takeover.
But I certainly agree. I mean, to be very clear, I think
that the bonuses were disproportionate. And we are doing all we
can to claw them back and to reduce any further bonuses to that
division.
Ms. Velazquez. So, did you have any--did you or any senior
Fed official have discussions or e-mail communications
regarding AIG's intention to make these bonuses not to the top
level, but to the other employees that were given?
Mr. Bernanke. As I mentioned, I was not personally informed
about this specific set of payments until March 10th. I then
checked the various options that we had, legal and otherwise,
and President Dudley communicated with CEO Liddy, as did the
Treasury Secretary, and President Dudley wrote a letter
expressing our deep concern about these bonuses.
Ms. Velazquez. Mr. Chairman, the Fed directly, through
special purpose entities, has extended AIG nearly $100 billion
in loans. For the record, are you confident that AIG will fully
pay back its loan to the Fed?
Mr. Bernanke. I am very confident. First of all, half of
the $100 billion is now no longer directly on the credit of
AIG. It is secured by other types of securities, which we are
assured will likely, very likely, pay us back and perhaps
provide some profit.
The remainder, $50 billion, half of it is directly owed, by
AIG; the other half is secured by senior preferred positions in
two of their strongest subsidiary insurance companies.
Ms. Velazquez. Given everything that we have seen, in the
event of a default by AIG on its government loans, the Fed will
seize AIG assets. Given the massive lapses made in the area of
executive compensation, I want to make sure that the Fed is
planning for the worst-case scenarios.
What plans has the Fed established to recover the funds
lent to AIG in the event it defaults on its loan from the Fed?
Mr. Bernanke. Well, as I have indicated, we have collateral
for all of our loans, including for the $25 billion, for
example, a senior lien essentially on all the assets of the
company. So we are quite confident that we will be repaid.
Ms. Velazquez. And so you are confident. Do you have
anything written to that matter that you can provide to this
committee?
Mr. Bernanke. We provide information regularly by law. I
think section 129 reports. We have given all of our 13(3)
lending, which provides in detail the arrangements we will
have, and we will be happy to provide you more information if
you would like to have it.
Ms. Velazquez. Thank you.
The Chairman. The gentlewoman from Kansas, Ms. Jenkins.
Ms. Jenkins. Thank you, Mr. Chairman, and thank you all for
your testimony today.
My constituents in Kansas have bailout fatigue, and just
last night, I had a telephone townhall meeting where folks
expressed a lot of frustration, especially regarding AIG
spending their tax dollars on these bonuses and for sending
some of their dollars to foreign counterparties.
So I am just curious, at what point did the Federal Reserve
or the Treasury Department realize that such a large sum of
American tax dollars would be sent to foreign financial
institutions, and is there a point at which European central
banks or other foreign governments have or will step in to
help?
Mr. Bernanke. Well, as we have discussed, it goes well
beyond the counterparties. The critical issue was AIG going
into default and creating enormous chaos in the financial
markets, or was it going to meet all of its obligations,
including those to foreign counterparties?
I would point out that the Europeans have also saved a
number of major financial institutions, and the issue of
whether those institutions owed American companies money has
not come up.
So I think that there is a sense that we all have the
obligation to address the problems of companies in our own
jurisdictions. In particular, the Europeans can appropriately
point out that it was under U.S. regulation or lack of
regulation and U.S. law that AIG failed, and in their sense, we
do bear some responsibility.
But our appropriate objective, I believe, was to avoid the
default of the company, which would have led to very severe
consequences in financial markets.
Ms. Jenkins. All right. Thank you.
And then finally, very simply, how much more money is AIG
going to need, and when can the American taxpayer expect to
start recouping their money?
Mr. Bernanke. Is there a timeframe that you would like to
talk about, Bill?
Mr. Dudley. Obviously, what happens to AIG going forward is
going to depend on the state of the economy and the state of
the financial system. And if we can get the financial system
repaired, then the outlook for the economy is going to improve,
and, therefore, the prospects for AIG will improve as well.
So we cannot say unconditionally what sort of money AIG is
going to need or not need in the future, but if we make the
right steps in terms of fixing the financial system, we will
improve the economy, and that will benefit AIG and protect the
U.S. taxpayer.
Ms. Jenkins. Thank you.
I yield back the balance of my time.
The Chairman. The gentleman from North Carolina.
Mr. Watt. Thank you, Mr. Chairman.
Mr. Dudley, it seems to me the other two gentlemen keep
punting the questions on AIG up to you, so I want to ask you to
provide, because I think the committee would benefit from
having an analysis of what the upside potential of the 79
percent ownership in AIG and the various other ownership
interests that we are taking in various other entities
associated with AIG.
I assume at some point we will divest that, but it would be
helpful to have a written analysis, I think, for the committee
of what that upside potential is; I know it is to some degree
speculative.
Mr. Geithner, Secretary Geithner, all of these questions
that I am asking are really forward-looking. I want to go to
your proposal for resolution authority.
We found out in the midst of this crisis that there was
emergency exigent circumstances authority given to the Fed to
do a lot of things that have been very important and
productive, but have also created a substantial degree of
discomfort going forward, with one entity having such
substantial authority to do what Chairman Bernanke has done, we
think, admirably, but creates some angst.
The effect of the resolution authority that you proposed in
your opening statement seems to me to suggest that basically
the Secretary of the Treasury would be the de jure interim
systemic regulator for things outside the banking system. Am I
misreading that?
Secretary Geithner. I did not mean to imply that, but you
are right that I think if you think about what is the right
balance for the country going forward, we can't put all of this
on the Fed.
Mr. Watt. Okay. But to put it on a political appointee, as
opposed to somebody who is not subject to political pressures.
Theoretically at least, Chairman Bernanke and the Fed is not
subject to those, the politics of the day. We know it is at
best, somewhat a theoretical statement.
But I guess the concern I would raise is about the prospect
of either making that a political appointee who has that
substantial authority, making it someone who has not
affirmatively been given the responsibility for--as a systemic
regulator, and the prospect that that, in an odd sort of way,
might even slow down our urgency to do this on a more permanent
basis.
I assume the authority you are talking about is authority
that you and Chairman Bernanke would think would be appropriate
to be given to whoever the systemic regulator is; is that
correct?
Secretary Geithner. There are two separate things. One is
where regulatory authority lies for containing risk in the
financial system.
Mr. Watt. I am not talking about the one you talked about
today; I am talking about outside the regulatory authority.
Secretary Geithner. Our resolution authority, our judgment
is we want to use a mechanism built on the current FDIC model
where a judgment to intervene, in some sense, requires a
judgment by the President and the Secretary of the Treasury, by
the Chairman of the Fed and by the Board, in a case--it is
likely to be also in the case of the Board of the FDIC.
Mr. Watt. But isn't that authority that you ultimately
would think would be appropriately vested in whoever has the
responsibilities for systemic regulation?
Chairman Bernanke, I would like your opinion on that, too.
Mr. Bernanke. No, those could be separated. The FDIC or
some other body could be in charge of resolution and deals with
those specific issues. And then in the oversight and financial
stability regulation, it could be done.
Mr. Watt. Even the decision about whether to exercise it?
Mr. Bernanke. The decision should be a joint decision, and,
in particular, the President should be involved.
Mr. Watt. Thank you, Mr. Chairman. My time has expired.
The Chairman. The gentleman from Delaware.
Mr. Castle. Thank you, Mr. Chairman.
Mr. Geithner, there are many reports that back in
September, when all this was done, you were president of the
Federal Reserve Bank of New York, that you were heavily
involved in this, and you probably had knowledge of the bonus
payments, at least that they may occur, at that point.
Can you tell us when you first really knew that these bonus
payments to AIG would be made?
Secretary Geithner. Congressman, I was deeply involved in
the decisions to intervene in AIG and the initial restructuring
decisions made. I knew that we had a big mess on the
compensation side to deal with, but I did not have--I should
have had, but I did not have detailed knowledge of these
particular legally contracted retention bonuses for AIG FP
until I was, as I said, briefed by my staff on March 10th.
Even though there was a lot of information that was in the
public domain, I was not aware of the details then until March
10th, but it would not have affected our choices at that time
because of the legal nature of those contracts.
Mr. Castle. There was also some discussion that you learned
in January, but you did not, about the bonuses?
Secretary Geithner. As I have discovered, a lot of this was
in the public domain earlier and in January, too. Although I
don't believe--well, in any case, I was not aware of the
details of the payments or their legal nature until March 10th.
Mr. Castle. Looking at the time around the time the
stimulus passed in the Senate, February 11th or 12th, whenever
it was, the Dodd language has been very much put into question.
I read it before, but, quickly, it shall not be construed to
prohibit any bonus payment required to be paid pursuant to a
written employment contract executed on or before February 11,
2009.
A lot of finger pointing is going on there.
My question is, were you involved in the writing of that,
or in the room? Was anyone who answers to you involved in the
writing of that or in the room? And do you know who might have
been in the room? Because Senator Dodd has indicated that there
were others in the Administration who were actually urging that
language.
Secretary Geithner. Treasury staff expressed concern, as
part of the legislative process, about that particular
provision as originally drafted. Because of concerns it was
retroactive, it could be vulnerable to legal challenge. I know
many other people who are part of that process expressed a
similar concern.
But the bill that emerged was a very strong bill, and it
did create an obligation on me, in a specific constructive set
of words in the public interest, to try to recoup those
payments. And that was the balance that was struck in the
legislation.
Mr. Castle. But you were not personally there when all that
occurred; is that correct?
Secretary Geithner. No, I was not. But as I said, the
Treasury Secretary did express concern about this specific
provision, and we did consult with Senator Dodd and his other
colleagues about a range of other dimensions of that
legislation in draft.
Mr. Castle. Mr. Bernanke, you indicated in your opening
about some of the pure lessons. There is an urgent need for
systemic regulation on nonbanks. And I am not sure exactly what
you meant by that, but I think of investment banks and hedge
funds and private equity insurance companies, and maybe people
like Warren Buffett, for all that matters, and maybe other
corporations. But exactly what did you mean by that in terms of
the kind of regulation that could be imposed?
Some of these are unregulated entities altogether at this
point. So if we were to have a systemic regulator, what should
we be doing in that capacity?
Mr. Bernanke. Congressman, there is a great deal to be
discussed here, but I would point to at least two elements. One
would be that every systemically critical firm, particularly
those organized as holding companies, should have a
consolidated regulator looking at the entire firm.
Now, in the case of AIG, for example, the OTS was nominally
the holding company supervisor because they had a small thrift,
but they were focused, presumably, on the actions relative to
the thrift. And it was obviously a poor match for them to be
looking at the activities of AIG FP.
What is needed would be a strong oversight regulator who
would be able to deal with all the aspects of the company for
all systemically relevant companies.
The second part, I believe, that would be important would
be to have some general authority to look at the system as a
whole, to look for weaknesses in regulation, to look for
problems in payment systems, to look for buildups of risky
positions, to look for issues with derivatives and so on to try
to provide an overview of problems in the financial system as a
whole, as opposed to focusing solely on each individual
institution in isolation.
Mr. Castle. Well, I tend to agree with you, although I
think it is very, very complicated. I know a lot of the credit
in this country shifted from banks to some of these other
entities, and we do need to have some control over it. But I
would hope we can all work together on making sure that is done
and done correctly at some point. It is relevant in the near
future.
Thank you. I yield back, Mr. Chairman.
The Chairman. The gentleman from New York.
Mr. Ackerman. Thank you, Mr. Chairman.
The furor last week on the part of the public, the media,
and the Congress over the outrageous bonuses was very, very
understandable, but the truth of the matter is the bonuses did
not create the problem. And even if all those people gave back
double the amount that they got in bonuses and spent the week
in the public pillory, which I presume they did, it wouldn't
fix the problem.
The real problem is greed, and I think that with all of the
roaring and chest beating that we did, and are continuing to
do, we are not really fixing the problem here.
I am sorry to say that some of us are learning that we have
hurt a lot of otherwise innocent and decent people who just
fulfilled their contractual obligations in different parts of
some of this massive company, having nothing to do with the
real problem that took place in the financial products
division. And we probably owe them an apology. And maybe, even
more than that, we owe them some kind of a remedy to the damage
that it looks like we have been engaging in. And we have to
start looking at that, too.
The problem is greed, assisted by innovation. And I think
part of the solution has to be that we have to exert a little
bit of common sense into the process, and I don't know that we
can legislate that or you can enforce it. But certainly there
are regulations and changes that we should be looking at, and
one of them should be expressed in a legal regulatory way that
says gimmicks are not financial products, and credit default
swaps, although they might have some value somewhere, are
really not insurance.
Looking forward, we should know that AIG is not the only
company that used credit default swaps. How big is that market?
How many other companies are out there, and are we looking at
them, and are we going to stop pretending that they are issuing
insurance and get those products back into the range of
reality, rather than letting people think they are insured and
then having to bail out all those other companies?
Mr. Bernanke. Secretary Geithner can speak about this
because he has done a lot of the work involved in trying to
strengthen the CDS market.
It was a particularly intense problem at AIG because they
were essentially using these swaps to sell insurance against
which they neither had capital nor hedging. And so when the
insured event occurred, then there were enormous losses. So
that was clearly a bad situation.
So one approach would be to make sure, from a regulatory
perspective, that those who use CDS instruments have
appropriate hedging or other protections to make sure that they
can pay off.
The other approach, complementary approach, is to trade CDS
not bilaterally over the counter, but through some kind of a
clear central counterparty.
Mr. Ackerman. We are in a crisis mode right now. You know,
if we discover that an airplane has a faulty flycam, whatever
that might be, you know, they usually ground the whole fleet
that has them, because of obvious reasons.
Are we looking at doing that, these other companies with
credit default swaps, to a large extent to see if we can ground
them until we fix the mechanism?
Mr. Bernanke. Well, that would have negative as well as
positive effects, because some companies use the credit default
swaps in order to hedge, that is to protect themselves, as
opposed to taking gambles, in the case of AIG.
Mr. Ackerman. I just want to suggest that we take a very,
very close look at that, because there is a clear and present
danger here that just like we are finding that there are many
Madoffs, there are many AIGs out there, and before we have to
start bailing them all out, maybe we should ground some of
them, too.
I yield back the balance of my time.
The Chairman. The gentleman from California.
Mr. Royce. Thank you, Mr. Chairman.
On the front page of the Wall Street Journal, Mr. Bernanke,
there is a headline titled, ``AIG's Rivals Blame Bailout for
Tilting Insurance Game.''
Now, this is something that a number of insurance companies
have talked to us about. I originally opposed the concept of
bailouts, and one of the reasons I thought it was important to
let AIG fail is the fact that now that the government is behind
them, they have extra power in the market.
Anyway, the story says, ``In the 6 months since the
government stepped in, AIG at times has slashed insurance
prices by more than 30 percent in some cases to fend off rivals
and to keep or win contracts, according to public documents,
insurance buyers, execs and others in the industry. This tack
has helped AIG ensure customers ranging from the U.S. Olympic
Committee and an Arizona airport, to an Illinois nursing home
and a Florida town government, as examples.''
Now, I raise this issue for two reasons. First, the obvious
competitive advantage AIG would gain within the market, if they
are, in fact, undercutting their competitors; and second, if
AIG is not offering actuarially sound rates on their insurance
products, it could result in more losses taken on down the road
by the owners of AIG, in other words, taxpayers, since
taxpayers now own 80 percent of AIG.
Can you verify to the markets within which AIG is operating
that AIG's subsidies will not have the full faith and credit of
the Federal Government in the future? And how confident are you
that the domestic insurance subsidies that have been put into
the process with respect to the subsidiaries of AIG are not
using the systemically significant label within the market to
undercut their competitors?
Mr. Bernanke. Well, on the competitive side, I am of two
minds, because AIG is losing business because of the taint and
the other problems with the reputational problems, and so you
would expect them to be more aggressive to try to retain some
of that business. So it is not clear whether that is an
undercutting or not. I am more concerned about the possibility
of underpricing in the second sense that you have mentioned.
There are investigations of this issue going on, or have
been undertaken. I believe that at least one or two of the
State insurance regulators who testified before Congress last
week suggested that they had looked into this, and, as far as I
understand, they have not found any substantial evidence of
this underpricing.
I believe the GAO is also looking at the issue, and I am
not sure exactly what stage that investigation is, but we will
obviously be very interested in that outcome.
Mr. Royce. Well, how can we assure down the road that AIG
and other recipients of government assistance are not being
viewed as being backed by the Federal Government? And this is
the concern that I have about your overall plan, that at the
end of the day we undermine market discipline because we
telegraph the message to the market that the government is
behind these institutions, and, therefore, as a consequence,
they are going to end up someday being overleveraged. They are
going to be able to borrow far more because the market
discipline won't be there, at far less interest rates, because
they are going to be perceived basically as borrowing at near
government rates.
And, you know, we saw this with Fannie Mae and Freddie Mac
that borrowed at very close to government rates and reported
profits to their shareholders, while the Federal Government
held the risk that eventually materialized last September. And
we saw them, basically, go into the business of arbitraging,
borrowing at near government rates, and then building up those
portfolios to $1.7 trillion and taking those risks that you
couldn't have taken in the market. But they became the biggest
player in the market because of the perceived government
backing of the institutions.
That is what I worry about in terms of the proposal that
you are making today, in terms of the impact of converting
other institutions basically into, shall we call them,
government-sponsored enterprises in a way, because you would
have the concept of the government behind them.
Mr. Bernanke. Congressman, I gave a speech, I believe, last
week exactly on the issue of too-big-to-fail, which I consider
to be a critical issue. And I addressed a number of approaches
to eliminating or reducing this problem, including, among other
things, having tougher regulations and supervision of these
companies, making sure they are not taking advantage of any
implied government backing to take risks and so on, and also
having the resolution regime that we have discussed that would
allow us to resolve these companies and to perhaps take
haircuts on creditors so that they will not be assured that
they will be protected.
Mr. Royce. Mr. Geithner, I would ask you the same question,
very quickly.
Secretary Geithner. I think you are absolutely right to be
concerned about this. I share that concern very much. That is
why the reform effort we are going to have to work with the
Congress on is going to have to address the moral hazard
created by these extraordinary interventions.
You are absolutely right to be worried about it. We need to
dial back this assistance when we get through the crisis, and
we have to put in place much stronger restraints on future
risk-taking.
Mr. Royce. But if you let them go bankrupt, you would
actually then have market discipline, and you wouldn't have to
worry about this, offsetting all of this.
The Chairman. The gentleman's time has expired.
The gentleman from California.
Mr. Sherman. Thank you.
What I fear here is that we are doing a Kabuki theater in
three acts. In the first act, Washington tells the American
people, we understand your anger at Wall Street. In the second
act, we nitpick to death any proposal that actually adversely
affects Wall Street. And then in the third act, we bestow
another trillion dollars on Wall Street under extremely
favorable terms.
Chairman Bernanke, in the hands of a maniacal Fed, section
13(3) could be used to make trillions of dollars of highly
risky loans. Fortunately, you have interpreted the law to say
that you are only going to buy paper that is triple A and
similar instruments. But let us say a year from now, Wall
Street comes to you and they say they need another trillion
dollars, and the TARP money has run out, and Congress is a
bunch of buffoons and populists and they won't provide
additional money, and they are idiots, so don't listen to them.
And Wall Street is unanimous in telling you that only you can
save the economy, and the only way you can do it is to buy
double-A paper or single-A paper and subject the Fed to that
higher level of risk. Would you then change your interpretation
of the law?
Mr. Bernanke. The law requires that we lend on a fully
secured basis; in other words, to be comfortable that the
collateral we are taking will allow for repayment of the loan.
That is why in the TALF and in the program that Secretary
Geithner just announced, we are not only taking a variety of
protections, including haircuts and the like, but we are also
having TARP capital to stand between us and the credit risk, so
we will be very, very careful not to take any credit risk.
Mr. Sherman. No credit risk; is that correct?
Mr. Bernanke. You never can go literally to zero, but very,
very little credit risk.
Mr. Sherman. Well, that is what triple A is, as little as
you can get.
Mr. Bernanke. Right.
Mr. Sherman. Mr. Geithner, you promised transparency, but
what the American people want to know is about the compensation
packages. Will you publish a list of all the TARP recipients,
the companies that got the money, and how many of their
executives--I don't want any person's name, just how many of
the executives earned more than $1 million in 2008, how many of
them got bonuses of over half a million dollars; and likewise
for 2009, how many of them are earning salaries of over $1
million a year, and how many of them have what appear to be
contractual rights to receive a bonus in excess of a quarter
million dollars? I don't think it is just about AIG
compensation, and I don't think the American people should be
blindsided and find out about bonuses on a Saturday that are
about to be paid on a Sunday. Can you give us a chart for each
TARP recipient?
Secretary Geithner. Congressman, you are absolutely right,
this goes well beyond the AIG. And the President proposed on
February 4th a range of reforms to broad compensation
practices, including proposing that boards of directors
submit--
Mr. Sherman. Mr. Secretary, it is my time, and I will
reclaim it. Are you going to give us the chart, or are you
going to hide the ball?
Secretary Geithner. I am not going to hide the ball.
Mr. Sherman. Are you going to give us the chart?
Secretary Geithner. I will reflect on the suggestion you
made and--
Mr. Sherman. In other words, you won't commit to telling
the American people how many folks at Goldman Sachs or AIG are
going to make $1 million this year?
Secretary Geithner. Congressman, I will think carefully
about your proposal.
Mr. Sherman. Thank you for thinking. Let me move on. I will
move on to the next question.
The law says the TARP bill--we said that the Treasury shall
require that the financial institutions that you invest in meet
appropriate standards for executive compensation. That is the
law. You are supposed to write the regulations. Not to your
credit, you have kept on Assistant Secretary Kashkari to honcho
this program. He came before this committee, and I asked him, I
said on December 10th--and I mailed a copy of this transcript
to you just as soon as you got sworn in, I am asking about
AIG--is a $3 million bonus an appropriate standard of executive
compensation, or has the law been violated? And your
quarterback said that he didn't think that a $3 million bonus
was necessarily inappropriate compensation. Then I asked him
about $30 million bonuses to AIG executives, and his response
was, well, I can't opine that wouldn't be appropriate
compensation.
Is this the guy who should be running the TARP program, and
when are you going to give us the regulations required by law,
and are those regulations going to prohibit million-dollar
bonuses and million-dollar-a-year salaries?
Secretary Geithner. Congressman, we are committed to
putting out those regulations. We will do so as soon as we can.
Mr. Kashkari, who is an excellent public servant, it is not his
job to make those judgments. That is my job. I am accountable
for making those judgments.
The Chairman. The gentleman may finish his sentence.
Secretary Geithner. And we are working on putting those out
so that we will have some clear standards to the American
people to govern these compensation practices going forward.
The Chairman. The gentleman's time has expired. The
gentleman from Oklahoma, I believe, is next.
Mr. Lucas. Thank you, Mr. Chairman.
Let us continue to look at the process of cleaning up
behind this parade. In Oklahoma, in the 1980's, we went through
a twin agriculture and energy resource boom and bust. And it
was fascinating after the FDIC got done stomping through the
arena how 5 and 10 and 15 years later, amazingly there were
some millionaires made of dealing and disposing of these
assets.
Could we talk for a moment about the public-private
investment fund? And if you could, just let me give you a real
world--from a perspective of the real world. For a typical
investor who might participate in this kind of a thing, this
effort to clean up the legacy assets, the toxic assets, for
$100, it could be $100 million, it could be $100 billion, but
for $100, how many dollars' worth of assets, Secretary, do you
envision that controlling or being worth?
Secretary Geithner. In the model we laid out, $1 of capital
from the government would come with $1 of capital from a
private investor, and they would be able to get borrowing from
the government in a range that is yet to be determined. But it
is potentially up to 6-to-1 leverage in this basic structure,
substantially less leverage than the bank normally operates
with, but that is the broader magnitude that is possible.
Mr. Lucas. So potentially the investor's dollar might
conceivably get them as much as $6 worth of assets, if the
assets--some assets would be a different value. Some would be
good, some would be bad, some would be totally worthless. If
the assets turned out to be bad, of that dollar put into the
fund, what is the investor's potential loss? Can he or she lose
it all?
Secretary Geithner. Yes.
Mr. Lucas. And the upside?
Secretary Geithner. The upside would be shared in portions
of the capital they put in. So the taxpayer will share in the
upside alongside the private investor.
Mr. Lucas. So my mighty dollar might get me 6 in assets; I
could lose it all if they turn out to be a bad portion of the
program. If they turn out to be good assets, as was observed in
Oklahoma in the 1980's, sometimes those ag properties and those
energy-producing properties are so dramatically undervalued
that a decade later--so there is a potential for it not only of
a complete loss of investment, but a potentially tremendous
gain then for the investor.
Secretary Geithner. For the taxpayer, too. The taxpayer
would share equally in those gains.
Mr. Lucas. As you envision the program, what dollar
amount--what level of player are we talking about? I am sure
this is not something that the small investor will be able to
be a part of.
Secretary Geithner. We want this designed so that the
potential gains can be shared as broadly as possible.
Mr. Lucas. So does that mean the buy-in is $100,000, $1
million, $5 million?
Secretary Geithner. We laid out some details proposed for
minimum investments. But, again, people will be able to
participate through--as the general asset management companies
that manage the pension assets of average Americans. So the
idea is to allow the American people the benefit alongside the
government of any potential gains, and the taxpayer, of course,
ultimately gets a better deal with this kind of structure than
they would if the government simply took on all the risk.
Mr. Lucas. And the reason I bring all this up, of course,
is potentially there will be some tremendous winners on down
the road, ones who have either picked wisely or by good
circumstance.
Let me flip to one more question. We have been very focused
on AIG compensation, the bonuses and all those sorts of things.
One other subject. A lot of compensation--and I am not a part
of corporate America, but a lot of compensation is not just
bonuses and outright salaries, it is things like stock options,
correct? As this economy picks up, how many of these financial
institutions--and I am asking a question that may not be
answerable, of course, but are we going to see at some point a
year or 2 or 3 or 5 years from now, the really big sums of
money made when these stock options that might be worth pennies
now or dollars now become tens or hundreds of dollars in the
future? Is that something that we should be prepared for as a
public official to explain to the folks back home 2 years, 3
years, or 5 years down the road?
Secretary Geithner. Technically, I think most of those will
have to be fundamentally renegotiated for the risk you are
raising to materialize. But it is very important that
compensation practice across the industry be fundamentally
reformed so that compensation is tied to long-term performance
of outcomes by the firm itself. And what the President proposed
on February 4th is that compensation above a certain limit,
particularly in cases where the firms are getting assistance
from the government, be it in the form of restricted stock that
is at risk, only pays back over time only after the taxpayer is
repaid. And for all firms that participate in these markets, we
want them to subject their compensation proposals to a
shareholder vote, so the shareholders will have the opportunity
to look at these compensation practices and make their own
judgment about whether they are appropriately rewarding risk
and not incenting excessive risk-taking at the expense of the
system as a whole.
Mr. Lucas. Have we ever had these kind of standards before,
just as a question?
Secretary Geithner. No. I think this is a necessary,
important part of a reform agenda. I think it is not possible
to run an effective risk-management framework without looking
also at compensation incentives, because they, as we have seen,
overwhelm all the checks and balances and limits that were set
by supervision and risk managers.
The Chairman. The gentleman from New York, Mr. Meeks.
Mr. Meeks. Thank you, Mr. Chairman.
I want to thank all three of you for your testimony today.
I think it has been very enlightening for me.
I want to just touch on a couple of things. First, one of
Mr. Ackerman's questions was about credit default swaps. Do you
think that we in Congress and you should work on some further
regulations, specific regulations, in regards to credit default
swaps? And if we do that, what effect do you think it will have
on the global financial system, and how can we work that out in
that regard?
Secretary Geithner. I think it is very important that
through a mix of law and regulation, we bring these markets
into an oversight framework that provides better protection for
the financial system. As part of this, I think it is very
important that the standardized part of these markets be moved
onto central clearinghouses and exchanges, and that we also put
in place much better reporting disclosure requirements. And as
the chairman just said, it is critically important that people
who get exposure to these instruments hold enough capital or
reserves or cushions against the risk those instruments
present. But I think comprehensive reform bringing these under
oversight should be a critical part of the reform agenda we
hope to work with the Congress on.
Mr. Meeks. Now, one of the--and we all--and sometimes we do
this often in Congress, we react to a situation, and all of us
reacted to the bonuses by AIG last week. And one of the things
that I heard when I got back home from some, coming from New
York, we are very concerned, because, of course, the financial
Wall Street is in New York. It contributes to a lot of jobs, a
lot of our economy, etc. One of the things that often was heard
was, when I got home, that a lot of jobs could leave New York
and go elsewhere, elsewhere being not in the United States; in
London.
My question to you is, what is your reply to that? I mean,
is that just talk because Wall Street tried to protect itself?
Is that a reality of something that could possibly happen? And
what should we do or could we do to try to make sure that as we
recover, we don't lose those jobs in the United States, and New
York, for example, remains the financial capital?
Secretary Geithner. The best thing we can do for New York
and the U.S. financial system is create a much stronger system,
a more stable system for the future. But to do that, we need to
make sure we bring the world with us, and the world as a whole,
all those other financial centers, London, Asia, continental
Europe, also put in place higher standards for protection,
because without that, there is a risk that capital will move,
business will shift from the United States, and we will end up
with a weaker system overall, as we have seen.
So the best defense for us is to make our system stronger,
not to wait for the world; make our system stronger, but try to
encourage them to move with us to put in place higher
standards, and that is what the President has committed to do.
Mr. Meeks. And I was wondering--and I know that there is
time for you to come with your standards that you are talking
about with reference to executive compensation and bonuses, but
I was wondering if there is a framework of which or reference
of which you are working on to make that determination, because
that is part of what the problem is here. Folks feel that there
has been the greed, or others feel that there has not been a
system put in place that they can understand and follow and
say, okay, this is what the rules are. Basically when people
say, tell me what the rules are, we will play by the rules;
don't change the rules in the middle of the game.
So is there something that you are putting in place so that
the markets and others can understand what the rules will be or
what you are governing by so we can have that confidence in the
market so we can move again in the direction that we should be?
Secretary Geithner. Yes, we share that objective. And just
to come back to the point you made before, even in this area,
there is broad support internationally to having standards that
apply to compensation, so that, again, there is more of a level
playing field generally across the financial system.
Mr. Meeks. I think my time has expired. I yield back.
The Chairman. The gentleman from Texas.
Dr. Paul. Thank you, Mr. Chairman.
When the chairman of the committee opened up the committee
today, he suggested that we look backward as well as forward,
and that all our problems didn't come from January 20th on, and
I agree with that. As a matter of fact, just looking back at
the last Administration isn't quite enough. And in order to
understand the problems that we face and understand the cause,
we have to look back possibly even several decades.
The debate today, so much of the discussion has been on
technical aspects, which I think are very important, but, quite
frankly, I think that deals a lot with the symptoms rather than
the basic cause, and I would like to deal more with the cause,
so I have a question for the entire panel, and the question
keys around this cause.
Right now, I think the Congress and the Treasury as well as
the Fed operate on the condition that the free markets failed,
and we didn't have enough regulation. Others will say that we
got into this mess because we have been living with a condition
of crony corporatism, inflationism, and interventionism. We had
inbred into this system a lot of moral hazard which encouraged
a lot of risk and a lot of guarantees, and that we would have
the lender of last resort, and we really didn't have to worry.
And it created, once again, a phenomenon that has been known
throughout history. It is called the ``madness of crowds.'' And
that certainly--that is nothing new. But there was certainly a
lot of madness going in the economy and in the marketplace.
But the question really comes out, who should allocate
capitalism, the free market, or should the government? And I
think that we had a system where the free market wasn't
working, and we didn't have capitalism. The allocation of
capital came from the direction of the Federal Reserve and a
lot of rules and regulations by the Congress. We had
essentially no savings, and capital is supposed to come from
savings. And we had artificially low interest rates.
So looking at all that, then this means we would have to
look differently at what our solutions should be. Everybody
loves the boom. That was great. Nobody questions all this. But
when the bust comes, everybody hates it, and then they quickly
to have decide what to do.
Unfortunately, I don't see that we are addressing the real
problems. We are not addressing--what we are dealing with is
trying to find a victim. Who is going to soak up the
derivatives, who is going to soak up the debt, who is going to
be penalized? And right now it looks like Wall Street is
getting bailed out, and the little guy and the middle Main
Street America and all are going to pay the penalty. And I
think this is--we are absolutely going in the wrong direction,
whether it is AIG or the rest. So we failed because we didn't
follow the marketplace, and then we do the same thing over and
over again, and we don't seem to improve anything.
So my question is this: How do the three of you operate in
your own minds? Do you operate with the idea that capitalism
failed, and they need us more than ever before to solve these
problems; or do you say, no, there is some truth to this? As a
matter of fact, a lot of truth to it is that we brought this
upon ourselves, that we had too much government, too much
interference in interest rates, too much risk, moral risk,
built into the system. Because if you come from the viewpoint
that says that the market doesn't work, I can understand
everything you do, but if I see that you have totally rejected
the market, and that we have to do something about it, I can
understand why we in the Congress and you in Treasury and you
in the Fed continue to do this.
So where do you put the blame; on the market or on crony
capitalism that we have been living with probably for 3
decades?
Mr. Bernanke. Congressman, I certainly do not reject
capitalism. I don't think this was a failure of capitalism per
se. And I also think the free market should be the primary
mechanism for allocating capital. Markets have shown over many
decades that they can allocate money to new enterprises, to new
technologies, very effectively. And so we want to maintain that
free capital market structure.
It is nevertheless the case that we have seen over the
decades and the centuries that financial systems can be prone
to panics, runs, booms, and busts. And for better or worse, we
have developed mechanisms like deposit insurance and lender of
last resort to try to avert those things. Those protections, in
turn, require some oversight to avoid the buildup of risk.
Dr. Paul. May I interrupt, please?
Mr. Bernanke. Certainly.
Dr. Paul. Isn't that what creates the moral hazard though?
Isn't that the problem rather than the solution?
Mr. Bernanke. Well, the reason the Fed was created in 1913
was because in 1907 and in 1914 there were big financial
panics, and there was no regulation there, and people thought
that was a big problem. Back in the 19th Century as well.
Dr. Paul. But they usually lasted about a year. And now we
are determined to make our corrections last 10 to 15 years, and
that is what we are working on right now.
Any other answers, please?
The Chairman. Not on this round, because the time has
expired.
The gentleman from Kansas.
Mr. Moore of Kansas. Thank you, Mr. Chairman.
To Secretary Geithner and Chairman Bernanke, the Special
Inspector General for TARP, Mr. Neil Barofsky, testified before
the Financial Services Oversight and Investigations
Subcommittee a few weeks ago that he estimated the total
exposure of the taxpayer was $2.875 trillion if you count all
the programs authorized by the Treasury Department, FDIC, the
Fed and others. Is that number still accurate, or do you have a
different estimate of how much taxpayer exposure we currently
have in all of these financial rescue programs; and do you
expect, can we expect, that the taxpayers will be fully repaid?
Mr. Secretary?
Secretary Geithner. Congressman, that, I suspect,
represents the total loans outstanding and capital extended by
the government. It does not reflect the risk to the taxpayer.
That requires a more careful judgment about the level of
collateral backing behind those loans. That requires a--that is
a hard judgment to make, but we would be happy to come back to
you and give you our best sense of what the components are in
that $2.875 trillion number and how you should think about
ultimately the risk to the taxpayer. But we are being very
careful to make sure these are designed in a way that they come
with very strong protections against the taxpayer.
I want to conclude, though, just with a sense of the
importance about our candor in this. The government is going to
take risk in this. There is no way we are going to get through
this financial crisis without the government taking risk the
markets can't take. So I cannot stand before you, nobody in my
business can stand before you, saying there is no risk of loss
to the taxpayer here, but we are going to do our best to
minimize that risk of loss.
Mr. Moore of Kansas. Mr. Chairman?
Mr. Bernanke. Speaking for the Federal Reserve, less than 5
percent of our lending is associated with the Bear Stearns and
AIG episodes. We believe that we will be fully repaid for those
loans, but concede that they are riskier than the other loans
we make.
The other 95 percent of our balance sheet is extremely
safe, mostly very short term. We have never lost a penny in any
of those programs. So even though it is true that the Fed has--
in one capacity or another--lent out a great deal of money, we
believe it is quite safe and that the taxpayer will, in fact,
make money, because the Federal Reserve through its profits
sends to the Treasury every year tens of billions of dollars.
Mr. Moore of Kansas. Mr. Chairman, I believe it was you who
testified and told a group of Members of Congress, myself
included, that if--and I think this was September of last
year--that if Congress didn't pass the legislation you were
looking for, there might not be a market the following week.
That strikes fear right there. I voted for both of the so-
called rescue recovery programs, and I told people back home, I
have been here 10 years, and those were probably the most
uncomfortable, hardest votes I have had, but I didn't see that
we had an option. And I take it you still believe that was the
right option.
Mr. Bernanke. Everything we have seen since then suggests
that the effect of the financial effects on the global economy
are extraordinarily powerful.
Mr. Moore of Kansas. Mr. Secretary, any further comment?
Secretary Geithner. I think that was an enormously
difficult act, but a brave, important act. I think without that
action and authority we would be in a much greater, much deeper
peril today, much deeper recession causing much more damage to
the American people, and facing a much more protracted period
before we have the chance of getting growth back, and it would
have been much more expensive ultimately to deal with it. So I
think that was a necessary act, and it helped prevent a much
more catastrophic outcome.
Mr. Moore of Kansas. Thank you.
I yield back my time, Mr. Chairman.
The Chairman. The gentleman from Illinois.
Mr. Manzullo. Thank you, Mr. Chairman.
Secretary Geithner, on page 1, paragraph 5, line 4, and,
Chairman Bernanke, page 2, line 3, of your respective
testimonies, you state that 401(k) plans, and presumably IRAs,
purchased insurance from AIG; is that correct?
Mr. Bernanke. Yes.
Mr. Manzullo. And the purpose of insurance was so that the
value would not fall precipitously; is that correct?
Mr. Bernanke. Correct.
Mr. Manzullo. So they bought insurance, and because of the
bailout, their requirement plans did not get cut in half; is
that correct?
Mr. Bernanke. They avoided the losses.
Mr. Manzullo. That is right.
What about the rest of the Americans; what about the rest
of the Americans who lost half of their savings in retirement
plans, plus had to put up $40 billion so other people could be
made whole because they bought insurance at AIG? Does that seem
fair?
Mr. Bernanke. Most of that decline has occurred since
Lehman Brothers failed in September. If we had been able to
avoid the failure of Lehman Brothers--
Mr. Manzullo. Wait a second. Most Americans have lost 40 to
50 percent of their IRAs and retirement plans. And in addition
to that, they have had to spend $40 billion in order to honor
the insurance plan of AIG so that the people who bought
insurance with them wouldn't lose any of their retirement
plans; isn't that correct?
Mr. Bernanke. These are loans which we expect to get paid
back.
Secretary Geithner. Congressman, could I try to answer
that?
Mr. Manzullo. I think that is an improper answer. The
American people have lost 40 to 50 percent of their retirement
plans.
Mr. Bernanke. The purpose of the action we took with AIG,
as I discussed in some detail in my testimony, was not to help
any specific counterparty.
Mr. Manzullo. But you did, you did. That is what happened.
Mr. Bernanke. It is unavoidable. We are trying to address
the entire--
Mr. Manzullo. No, I understand. You did not address the
entire issue because most Americans still lost 40 to 50 of
their retirement--
Mr. Bernanke. We are working hard to get--
Mr. Manzullo. --plan.
The Chairman. Mr. Chairman, the rule is that we get to talk
whenever we want. That is the rule.
Mr. Bernanke. Sorry.
The Chairman. The gentleman from Illinois.
Mr. Manzullo. And they are paying $40 billion so that other
people don't lose any of their retirement plan. That is what
your testimony says, and that is what happened, isn't it?
Secretary Geithner. Congressman, those losses to the
American people--
Mr. Manzullo. Give me a yes or a no, please.
Secretary Geithner. --would have been far greater--
Mr. Manzullo. No. I am asking the questions. Did the people
who took out insurance with AIG to insure their retirement
plans get reimbursed 100 percent so they suffered very little
loss, yes or no?
Secretary Geithner. It depends on the nature of those
specific contracts, it depends on each of those contracts. But
what the critical thing is the damage to the average American
pension fund--
Mr. Manzullo. But you did not answer the question. The
average American person has already lost 40 to 50 percent of
their insurance plan.
The Chairman. If the gentleman will withhold.
I would ask the people in that second row to stop the
gesturing and the conversations. People are here to listen.
Conversations are going on. They will end, and if there is any
further disruption, I will ask the officers without any further
intervention to simply escort people out.
Please continue.
Mr. Manzullo. Thank you.
The American people have lost 40 to 50 percent of their
retirement plans; IRAs and 401(k)s. But people with retirement
plans who bought insurance from AIG did not suffer that loss;
isn't that correct?
Mr. Dudley. If I could just make one point here?
Mr. Manzullo. Can't anybody just say yes or no?
Mr. Dudley. Could I make one point?
Mr. Manzullo. If you can give me a yes or no.
Mr. Dudley. The insurance was on the stable value funds. If
the investors in the stable value funds had taken losses in the
AIG case, this would have destabilized stable value funds
broadly--
Mr. Manzullo. The answer is yes, isn't it?
Mr. Dudley. --broadly throughout the U.S. economy.
Mr. Manzullo. The American people paid $40 billion so
people with retirement plans that had insurance with AIG did
not have to lose; isn't that correct?
Mr. Bernanke. They lent $40 billion to avoid a catastrophic
collapse to the system.
Mr. Manzullo. Can you give me a yes or no, anybody there,
please?
Mr. Bernanke. You said it was the purpose. That was the
purpose.
Mr. Manzullo. I have 14 percent unemployment back home. We
could lose lots of factories. People are desperate. Half of the
people have lost half their retirement, or most have lost half
of the retirement, and not one of you three can give me a yes
on that answer or no.
Mr. Bernanke. Because it is a poorly posed question.
Mr. Manzullo. Well, then it is poorly written in your
statements. The question is very simple. Maybe I should make a
statement that American people had to bail out AIG so that they
could honor the insurance plans with people who bought
insurance on their retirement plans, but most Americans still
lost 40 to 50 percent of their retirement plans.
Mr. Bernanke. If we had not made that action, they would
have lost 70 percent.
Mr. Manzullo. The AIG people lost 70 percent?
Mr. Bernanke. No, the American people.
Mr. Manzullo. Well, thank you for that correction. That
makes me feel even better.
But the point here is that American people had to pay $40
billion in order to make sure that people in AIG got 100
percent of their retirement plan, and that is why American
people are really upset.
The Chairman. The gentleman from Massachusetts.
Mr. Capuano. Thank you, Mr. Chairman. Thank you, gentlemen.
I am not going to focus too much on the AIG issue because I
think most of it has been said the other day when Mr. Liddy was
here. I think Congress has spoken. I think you understand how
we feel and what we would like to do. And I also think that in
comparison, the proposal that was put out today is much more
important to the general economic wellbeing of this country.
I guess I want to start with a couple of things. I heard, I
think, at least two of you say, maybe three of you, that you
didn't have the authority to do something earlier. Well, I
would respectfully disagree with that legal. I understand. I
don't want to rehash it, but you have used the term ``exigent
circumstances'' to a fare-thee-well to get into things the Fed
never got into before, no one would have thought they could
have gotten into: auto loans; student loans; mutual funds. And
the truth is I have supported that because I think it is
necessary at the moment. I believe you could have used the same
term to get into these issues beforehand to have avoided these
issues had you tried. Again, past history, but nonetheless I
still believe that you can do it.
I want to talk about the plan. I have a few questions. I am
trying to figure out the last 24 hours or so. And I guess I
want to, first of all, understand. I see the FDIC as
effectively a taxpayer-funded organization. I know it is not
technically through taxes, but it is, because we all know that
if the FDIC failed, we would bail it out. I don't think anybody
really doubts that, number one.
Number two is taxpayers pay it through fees, if not through
taxes. I know the fees aren't assessed to them directly, but
effectively we all pay it through higher bank fees or lower
interest paid by the bank. It is all passed through. If the
FDIC is included, it is not a 6-to-1 ratio, it is a 13-to-1
ratio. Every dollar that is spent on this new program through
the FDIC and the taxpayers directly will be 93 percent paid by
taxpayers. So it is a 13-to-1 ratio, not 6-to-1, if you count
the FDIC. If somehow you don't count them, I guess it is 6-to-
1, but if the FDIC fails, it is on us.
I guess a couple other questions I have, we are targeting
about $1 trillion of these toxic assets. Am I wrong to think we
have anywhere from $20 trillion to $50 trillion of these assets
sitting out there someplace? Is that a wrong number?
Secretary Geithner. Well, that is large. The total assets
of the banking system are roughly the size of the annual GDP,
which is roughly $14 trillion now. So that is too big a number.
Global financial assets are much larger than those held by U.S.
banks.
Mr. Capuano. So globally, all right. But it is higher than
a trillion?
Secretary Geithner. True. But the assets that this program
targets--
Mr. Capuano. I understand that. I understand what it
targets. It targets all the triple A stuff, which, of course,
amazes me. You are using ratings by the very credit rating
agencies that have now been completely undermined. And anybody
with faith in these ratings, I guess, hasn't been paying
attention the last year. But so be it, you have to draw the
line somewhere, and I guess that is all we have.
I want to ask specifically about the FDIC's role here. The
FDIC, as I understood it, but, again, without getting into
glorious words, was there to protect me as a depositor up to
$100,000, now $250,000. We are trying to extend that. That is
what they are there for. And yet in this case, they are being
used to finance the purchase of toxic assets, nothing to do
with what anybody would have thought the FDIC was supposed to
be used for. And they are being used, as I understand it, and
correct me if I am wrong, to basically float collateralized
debt obligations backed by these very toxic assets in order to
fund the purchase of these toxic assets, getting them off the
books of the investors and putting them on the books of the
taxpayers. What am I missing?
Secretary Geithner. First, FDIC fully supports this
program. It uses an existing--
Mr. Capuano. I don't care whether they support it.
Secretary Geithner. But it is important because this is
based on an existing mechanism that they use in design as a
normal part of what they do as the principal resolution
authority in the United States today. So they have broad
experience doing this well, and they helped design this, fully
support it.
The reason we are doing this, Congressman, is because we
think it is the best way to protect--
Mr. Capuano. No, I understand why you are doing it. Answer
my question. Are they going to fund these things by floating
collateralized debt obligations?
Secretary Geithner. No.
Mr. Capuano. Then why is it that on your Web site? You say,
the buyer would receive financing by issuing debt guaranteed by
the FDIC. The FDIC-guaranteed debt would be collateralized by
the purchased assets. What am I--is this not right, or am I
reading it wrong?
Secretary Geithner. I just wouldn't call that a CDO.
Mr. Capuano. Okay. But it is a collateralized debt somehow
backed by a toxic asset.
Secretary Geithner. But, Congressman, it is good for the
FDIC borrowing to be secure.
Mr. Capuano. No, no, no, no. We can disagree on what is
good or bad. That is what it is. And I understand that you
think it is good; otherwise you wouldn't have proposed that.
First of all, I want to make it very clear, I think you
gentlemen are well-intended, intelligent men who are trying to
save the economy. I think your motivations are fine. I just
think you are dead wrong on this one. I think you are
jeopardizing the FDIC. I think you are taking it--in this
particular case, yes, taxpayers may benefit if there is a
profit, 50/50 benefit, but if there is a loss--
The Chairman. The gentlewoman from Illinois.
Mrs. Biggert. Thank you, Mr. Chairman.
I think that from the very beginning we have always said we
need to restore confidence in the market and to provide the
taxpayer with protection. But I think we also--and I think what
has happened in the last week or so, that we need to restore
investor confidence and confidence in our government, in the
Federal leaders, rather, and the regulators that if Americans
work hard and run a solid company, they are not going to be
subject to punishment from the government if they do well.
And on that note, I think that we need to work together
really to focus on this economy, and I am afraid that we are
just not doing it, or not getting all the information. What
came up at our hearing last week was I asked the question of
Mr. Liddy about the three trustees that were appointed to--I
believe to represent U.S. taxpayers' interest on the AIG Board.
We never even heard, or at least I hadn't, and I suspect most
of the members hadn't even heard, about these trustees and how
did they--you know, how did they--what happened with informing
the taxpayers about the bonuses and things?
And I think we need to move ahead, and I hope that we are
going to really take a holistic look at all of these
provisions. We are talking about executive compensation without
looking at the whole picture. Now we have a new plan, and we
see that there seems to be some increase in confidence here.
So I have just a couple of questions. Number one, how
many--Secretary Geithner, how many actual--what are your
resources in the Treasury Department to do this right now?
Secretary Geithner. We have a very strong overview; we are
working very hard. We are going to need some more people,
though, and we are working very hard to bring in enough talent
to help us get through this.
Mrs. Biggert. And I think that should be a focus. I mean,
it is going to be difficult to find these people, isn't it?
Secretary Geithner. We are finding a lot of people willing
to come serve their country in this moment of challenge, and I
think that is very encouraging.
Mrs. Biggert. So can you give me a number of people?
Secretary Geithner. A number of people that we need?
Mrs. Biggert. A number of people who are actually working.
Secretary Geithner. Across the entire Treasury?
Mrs. Biggert. Yes.
Secretary Geithner. Oh, I can't do that today.
Mrs. Biggert. No, no, no. I meant that you are relying on
to do this.
Secretary Geithner. In the domestic finance part of the
Treasury, I would be happy to give you the exact numbers of
staffing today. And again, these are terrific people working
very hard, but we are going to need more.
Mrs. Biggert. Thank you.
And then, Mr. Chairman, how many are working on this issue
in the Federal Reserve?
Mr. Bernanke. Which specific issue?
Mrs. Biggert. Well, working on AIG right now.
Mr. Bernanke. AIG is being managed by the Federal Reserve
Bank of New York, primarily President Dudley, who is here. He
has about 10 of his people in the firm every day all the time,
and they are supported by analysts both at the Federal Reserve
Bank of New York and at the Board.
Mr. Dudley. We also have some outside consultants that we
have hired to help us in certain areas where we don't have the
expertise internally.
Mrs. Biggert. I saw an ad in one of our local newspapers
just asking for someone who could unravel the mortgage-backed
securities. Which brings me to the next question. So I have an
investor in my district, and they want to be part of this and
purchase some of these legacy assets, as you are calling them
now. How would they go about doing that? Can an individual
apply if this program goes through to purchase this, or do they
have to be part of this five or six management group?
Secretary Geithner. Individuals will most realistically
benefit through the professionals who manage their pension
funds or other financial assets. That is the most direct way
they are going to be able to benefit.
Mrs. Biggert. Well, what if they are an investor, and they
have private equity?
Secretary Geithner. Well, it depends on whether they meet
the broad conditions we are going to establish to try to
protect the American taxpayer. Again, we want to make sure that
the investors and the asset managers meet the highest standards
for care and competence.
Mrs. Biggert. Then, Chairman Bernanke, could you answer the
question about the three trustees? Are you in touch with them?
Mr. Bernanke. Yes. They have only been appointed relatively
recently, and their job is basically to oversee the voting
interest of the U.S. Treasury. They are very high-quality
people, and they will be involved in our discussions.
Mrs. Biggert. And Secretary Geithner?
Secretary Geithner. Yes.
Mrs. Biggert. Are you working with the three trustees?
Secretary Geithner. Yes, although I haven't had the
opportunity to do so since I took on this post, but I am sure I
will have the chance.
Mrs. Biggert. And you were doing that, working with one of
them when, you were the trustee or in the New York Fed.
Secretary Geithner. Well, this structure was designed in
cooperation with the Treasury and the Board when I was
president of the New York Fed, and the selection process for
those trustees, I believe, concluded before I left the New York
Fed. And as the chairman said, these are very capable public
servants.
The Chairman. The time has expired.
The gentleman from Massachusetts.
Mr. Lynch. Thank you, Mr. Chairman.
Thank you, gentlemen, for trying to help the committee with
its work. The AIG situation is a special case. I want to ask
you about an agreement that I tried to question Mr. Liddy about
last week. But AIG was a special case because of, as you said
in your opening testimony, Mr. Secretary, that they were
basically on the brink, and that you did act with greater
urgency at a very precarious moment. We also--as the taxpayer,
we stepped up in a very big way, taking a 79.9 percent share,
call it 80 percent. We became the rescuer of AIG. But for the
presence and intervention of the American taxpayer, I don't
think anybody would argue this company was going under.
And, in fact, I handed out copies of the retention bonus
that is at the source of a lot of this hearing. The language in
the retention bonus agreement drafted in December of 2007,
basically covering the AIG financial products employees,
anticipates this in a way; not in a way, specifically. It
clearly says that the impact of the credit default swaps and
underlying collateral debt obligations will not affect the
bonuses.
This infuriates me that employees at the firm in this
business saw that these things were so weak and said, okay,
what are we going to do here, we are going to build a firewall
between the damage that is going to affect the taxpayer--they
didn't know it was the taxpayer, but their creditors--and we
are going to protect our bonuses. It makes me crazy that they
did this. It also, in fact, reserves a certain part of the--
well, $67.5 million, I think it was--that regardless of what
happened to the company, they would get their bonuses.
And it just seems to me that there are grounds in that for
repudiating these contracts. The fact that as they saw
bankruptcy looming, they said, okay, the creditors are going to
come in here at any point now and lay claim to our assets, so
what we are going to do is we are going to make a special
agreement to take care of ourselves. And that is why I made the
analogy last week of the captain and the crew reserving the
lifeboats.
This is completely objectionable. And I just want to ask
you, you know, I think we have a cause of action here as
shareholders. You know, I don't dispute bonuses generally. I
think they can work. But in this special case, is there not, in
essence, a fraudulent conveyance here to escape the creditors
who are the people we represent, the people who stepped up and
did the right thing, rescued this company? And what did we get,
you know? We get this. So if you just talk to me about this.
And I know about the Connecticut law, and I still think that
these are supervening incidents that could delete the contract.
Mr. Secretary?
Secretary Geithner. Congressman, I say it well, and I
completely share your frustration. Think of the position I am
in. I feel more strongly than you do. And we are looking very
carefully working with lawyers in the Executive Branch at all
legal avenues to go back and see if we can get this back. And I
am sure that we are looking through at exactly the argument you
are making, but I can't tell you today that we found a way to
do it in a way that is going to be effective for us. But we are
on it, and we are looking at it.
Mr. Lynch. Well, look, if you are not going to go forward,
then this committee needs to know that so that we can go
forward, because I certainly think the argument needs to be
made. And I also know that Connecticut law gives discretion to
the judge. I don't think our case is arbitrary or capricious; I
don't think it is unreasonable. I think it is well-grounded. It
is not made in bad faith. We are actually looking at
circumstances that we didn't see when these agreements were
made.
Mr. Chairman.
Mr. Bernanke. We will check this with our legal advisors,
or we will work with the Secretary as well. I am hopeful that
you are right. We would like to explore every possible option.
And this is a perfect example of what I was talking about
before where compensation is not related to the risk-taking in
an appropriate way.
Mr. Lynch. Mr. Dudley?
Mr. Dudley. I agree with what you just heard from the
Treasury Secretary and the Chairman. It is pretty egregious, as
you have noted, and we will look into what can be done on that
basis.
Mr. Lynch. Mr. Chairman, I yield back.
The Chairman. Let me make an announcement. The Secretary of
the Treasury has to leave at 1:00, but he will be back on
Thursday. So I will announce that on the Democratic side, any
members who wish to pass in this hearing now will go at the
head of the list on Thursday. Mr. Bernanke can stay a little
longer. But members who wish to ask the Secretary of the
Treasury after 1:00, there will be a few more we can get in. On
the Democratic side, we will begin with any member who is here
and passes up his chance, a lot of people aren't here, and then
we will go back to the regular order.
The gentleman from Texas.
Mr. Hensarling. Thank you, Mr. Chairman.
Secretary Geithner, I would like to understand the AIG
bonus timeline a little better, if you could comment upon it.
It was September 16th, when you were president of the New York
Fed, that the first intervention took place, correct?
Secretary Geithner. That is right.
Mr. Hensarling. And then I think you said in earlier
testimony, you knew there were--there were public filings. You
were not personally aware of them. As I understand, on
September 22nd, AIG filed its AK, which discusses a retention
program, but you were not--is that correct?
Secretary Geithner. I was not aware of those filings then.
Again, I knew at that point, we all knew, that there was a
whole range of compensation issues we were going to have to
deal with.
Mr. Hensarling. Okay. But you were not personally aware of
this public disclosure? I understand in November of 2008, a
spokesman for the Federal Reserve, Calvin Mitchell, stated that
the Federal Reserve, the Treasury, and the New York attorney
general all knew about the AIG bonuses in the fall of 2008. Do
you have any knowledge of that?
Secretary Geithner. Well, I am sure what he said is
correct. But again, there is an enormous number of compensation
plans that crossed this entity, and they have required--we had
different approaches for dealing with them. They had different
basic challenges for us, as you have heard. And the particular
challenge we are dealing with today is these legally
contractual commitments.
Mr. Hensarling. Mr. Secretary, AIG, representatives of AIG,
have alleged--and I may mispronounce her name--Sarah Dahlgren,
who was one of your top aides when you were heading the New
York Fed--they state that on November 11th, she was personally
briefed on the AIG bonus plan in New York. Do you have any
knowledge of that?
Secretary Geithner. Well, again, I am sure that those
dedicated public servants were looking at a whole range of
compensation that we are dealing with.
Mr. Hensarling. I am just asking, were you personally aware
of it, yes or no?
Secretary Geithner. I don't know if she was briefed on that
particular moment, no.
Mr. Hensarling. And then again on November 24th, AIG again
disclosed in a Form AK about these retention programs, but,
again, you did not specifically read that AK?
Secretary Geithner. About these specific retention
programs?
Mr. Hensarling. Yes.
Secretary Geithner. No.
Mr. Hensarling. Okay. And then on February 28th, according
to Time Magazine, the New York Fed informed Treasury staff that
the bonus payments were imminent.
Do you have any personal knowledge of Time Magazine's
assertion in this regard?
Secretary Geithner. Again, I did not know of the details,
timing, or precise nature of these things until March 10th.
But, Congressman, as I said, that is my responsibility. The
question is whether we had better options than the ones we were
confronted with on March 10th, and I do not believe we did.
Mr. Hensarling. Let me ask you another question, Secretary
Geithner. In your testimony, I believe on page 2 you talk about
AIG's financial products division, ``This division was an
unregulated entity operating an unregulated market.''
Several days ago, the head of OTS testified before this
committee, and we had an opportunity to question him. He
testified under oath, and I asked him if he had the power to
regulate the financial products of this division that brought
AIG down. And I will give you the specific question and answer.
So this is myself: ``So again, in retrospect, it wasn't the
lack of authority, it wasn't the lack of resources, it wasn't
the lack of experience; you just flat made a mistake; is that a
correct assessment?''
Mr. Polakoff: ``Yes, sir. In 2004, we failed to assess how
bad the mortgage economy, the real estate economy would be in
2008.''
Now, he testified under oath. So did he perjure himself,
did he make a mistake, or are we talking about apples and
oranges here when you said that this was an unregulated entity?
Because the head of the OTS seems to think it was a regulated
entity.
Secretary Geithner. I believe that neither the entire
entity nor that particular division was subject to an effective
framework of oversight with broad authority and appropriate
sophistication in the exercise--
Mr. Hensarling. So it was effective regulation, not
necessarily lack of unregulated entity.
Secretary Geithner. Congressman, I am not going to disagree
with what my colleague at the OTS said, but I don't believe you
can look at the system today we have in the United States and
say that there was an effective framework of regulation over
that entire entity, not just this particular division.
Mr. Hensarling. I see my time is running out. We will see
if we have time at least for the question, perhaps not the
answer.
In today's Wall Street Journal it says that various
Administration officials, including yourself, have called
various folks on Wall Street to apprise them of the plan that
you announced yesterday. And part of it says, White House aides
returned to some key Wall Street fundraisers who had helped
give credibility to Mr. Obama's Presidential campaign.
Do you agree with what the Wall Street Journal said, and if
so, did these people receive any advantage from knowing about
the program?
Secretary Geithner. I have not read that report, and I do
not agree with the implication you are drawing from it. But as
part of designing these programs, we normally do have to do
some consultations, carefully designed consultations, with
market participants. But those are all carefully managed to
prevent against the risks you were referring to.
The Chairman. The gentleman from North Carolina.
Mr. Miller of North Carolina. Thank you, Mr. Chairman.
I understand that Ed Liddy is working for $1 a year. I
don't doubt that he took the position to serve his country. I
don't suspect for a second that he has personally profited in
any way by any decision that he has made. And I know he took
harsh questions last week, including from me. But he was also,
at the time he accepted the position on the board of Goldman
Sachs, and had been for more than 5 years--he had been chairman
of the audit committee, and presumably was involved in
decisions about valuing counterparty positions on credit
default swap contracts with AIG FP.
Was there any discussion about whether appointing Mr. Liddy
created issues of appearances, and about whether he really
brought in the detachment and the fresh eyes that were needed?
To either Secretary Geithner or Chairman Bernanke.
Secretary Geithner. I want to say one thing is important
about this. I would never, and I don't believe anybody at this
table would ever, make a judgment because it would benefit a
specific firm in this context, either AIG or any of the
specific counterparties in this context. I would never do that,
never put my Department in the position of doing that.
Now in that particular case, with respect to Mr. Liddy, the
choice of the chief executive and the suggestion that he be
appointed was not made by the Fed, the New York Fed. I was
presented with him as a possible candidate. I did an
independent assessment of whether he was qualified for that. In
my judgment he was an excellent choice and brought us the
extraordinary benefit of having somebody very experienced and
capable come in and run this company. Now, and I don't believe
that anything he has done since then is vulnerable to criticism
that he has been doing so in a way effective--anything but
serving the interest of the American taxpayer and helping that
company dig out of this mess.
Mr. Miller of North Carolina. Secretary Geithner, there is
a concept called the appearance of impropriety; not
impropriety, but the appearance of impropriety. He was on the
board of directors of the company that had--Goldman Sachs,
which had the most exposure to credit default swap contracts
with AIG FP.
Now, I was very careful in saying I am not suggesting that
he has personally profited, but there may be a natural tendency
to think of the public interest in terms of the interest of
people you actually know. And there might be a tendency to
think of the public interest and Goldman Sachs' interest as
being more interrelated than other Americans would see them.
And that appearance is what I am getting at.
Was there not any discussion of whether there was a problem
with the appearance?
Secretary Geithner. We have to make choices in this
context. It is about alternatives. In our judgment that was the
best choice at the time.
Mr. Miller of North Carolina. So there was no discussion of
any appearance, any issue of appearances, or whether by virtue
of his own having been involved in decisions about valuing
credit default swap positions that he would be pretty
sympathetic to people who are counterparties?
Secretary Geithner. No concern about that particular issue.
But, of course, we knew where he was coming from and what his
experience was, but that broad mix of experience made him an
exceptionally qualified person to take this job.
Mr. Miller of North Carolina. Okay. I have been assuming
all along that we had smart, aggressive, mean lawyers looking
at possible personal liability claims against people who have
been involved personally in these decisions; that, yes, these
companies are now unable to pay their bills, unable to pay
their debts, but a couple of years ago were doing fabulously
well. That money is now gone. In the words of the country music
song, it is in a bank in someone else's name. And we have
showed very little interest, Mr. Liddy showed no interest, in
pursuing personal liability claims against officers or
directors or employees based upon breach of fiduciary duty, or
other fraud, fraudulent conveyance, negligence, any other
theory. Are we looking at personal liability claims against the
people who are involved in these decisions and have profited
fabulously from them?
Secretary Geithner. As I said, we are looking at a range of
legal avenues with lawyers, smart and aggressive lawyers. I
don't think they are mean lawyers, but smart and aggressive
lawyers.
Mr. Miller of North Carolina. I know some mean lawyers.
Secretary Geithner. Maybe we could use some mean lawyers at
the Treasury and the Justice Department. And I promise you, we
are exploring all available legal avenues.
Mr. Miller of North Carolina. Thank you. No further
questions.
The Chairman. The gentleman from South Carolina, Mr.
Barrett. And this will be the last question for Mr. Geithner.
Mr. Barrett. Gentlemen, thank you for coming.
Secretary Geithner, last year Secretary Paulson came to the
United States Congress and sold the TARP, the Troubled Assets
Relief Program, and they were going to buy toxic assets. Was
the Treasury's assistance to AIG consistent on how he sold the
TARP originally?
Secretary Geithner. Congressman, I don't think I can answer
that question. I was not Secretary of the Treasury then, was
not present in that context.
Mr. Barrett. I understand. But you understand how he came,
the last Administration came and sold it to the United States
Congress. And I think it is really simple: Do you think it was
consistent with how it was sold to the United States Congress?
Secretary Geithner. I do know that the legislation you
passed did provide this very important authority for the
government to put capital into the financial system. And I
think he did use that authority appropriately and very quickly
to help save the system.
Mr. Barrett. I understand that.
Mr. Chairman, what would you say?
Mr. Bernanke. Yes, I think it was appropriate. The
legislation allowed for purchase of financial securities--
Mr. Barrett. You said appropriate, but was it consistent?
Was it consistent with the way it was sold to the United States
Congress?
Mr. Bernanke. The emphasis that the Secretary put was on
purchases of assets, and it is true that he did not follow
through on that. But it was still part of the discussion and
part of the legislation to use the money to support failing
institutions or to provide capital to healthy institutions.
Mr. Barrett. Secretary Geithner, I applaud you on your
statement yesterday about going to buy the toxic assets. I
think that is something we should have done months ago. But
because of Congress' action last week with the AIG bonuses, who
in their right mind in the private sector would want to enter a
contract with the United States Government and say, hey, yes,
we are going to help you, and not expect some type of the full
weight of the Federal Government going to come down on them if
they make the wrong decision?
Secretary Geithner. Well, you are right to express that
concern, and we are going to have to make sure that we design
these conditions carefully to help mitigate that risk. And we
are going to have to come to a better balance with the Congress
as again we try to figure out how to respond to the reasonably
perfectly understandable public outrage. We are not using
public assistance to reward failure, but still get our system
working again, and that is going to require people taking risk,
be willing to take risk so the government doesn't have to
assume all the losses in solving this financial crisis. And we
are going have to get to a better place, both the Congress and
the Executive Branch, on this very complicated question.
Mr. Barrett. And I would hope before we do that, we have
some very clear guidelines from both sides. If I am in the
private sector, and I am thinking about buying one of these
toxic assets, I think somebody has something in my water, there
is no way.
Mr. Chairman, would you agree with that? I mean, are we
going to have some problems in the private sector with that?
Mr. Bernanke. I do think we have to provide assurances to
participants and say the TALF and the PPIF, that their
involvement will not be retroactively penalized in some way.
Mr. Barrett. Yes.
Secretary Geithner, undated letters of resignation, I know
you know what those are. Have we used any of these with AIG?
Have we used any of these with other organizations, you know,
when the Federal Government steps in? Do we have a letter that
says, ``Hey, you sign it, and I will date it?'' Are we doing
anything like that to make sure that people are held
responsible for their actions?
Secretary Geithner. Good question. Absolutely, we will hold
people responsible for their actions. And, again, just
remember, on that day in September when we acted, right away we
changed management, brought in a new management team and began
a process of changing compensation, because we wanted to ensure
there was accountability for the judgments they made that
brought this company to the brink where it was going to
threaten the basic framework of the U.S. financial system.
Mr. Barrett. Specifically with undated letters of
resignation?
Secretary Geithner. I don't know that we used that tool,
but I am not sure we need that tool, Congressman. But I think
you are right to insist we need to make sure there is
accountability in these cases.
Mr. Barrett. I guess the last question I have, which is the
$64 million question--or I guess maybe I should say the $64
trillion question--is, what is the backup plan? I mean, if
everything fails, what do we do? Where do we go from here?
Mr. Geithner?
Secretary Geithner. Congressman, this plan will work. This
plan, because of the authority provided by the Congress, not
just to the Treasury but the Fed, gives us broad ability to do
what you need to get through a financial crisis like this. It
just requires will. It is not about ability. And we just need
to keep at it. And we will need to work with Congress to make
sure we can do this on a scale that is going to make it work.
But the program we need to lay out, which will help make
sure that there is capital available to financial institutions,
that these institutions have confidence that they can meet
their commitments, have access to funding liquidity and allow
them to play their role in providing credit in these programs
to get credit markets working again--you can already see, where
we are doing this, you can see interest rates come down in ways
that benefit small businesses, working families across the
country. We just need to keep at it and make sure people
understand we are going to get through it and we are going to
do what is necessary.
Mr. Barrett. Thank you, Mr. Chairman. I know my time is up.
Thank you, Mr. Chairman.
The Chairman. I would ask the gentleman for a second to
yield to me to say that, in the legislation we are dealing
with, we are being very clear that we want to restrict this to
people who get the capital program. And we will work with the
gentleman to make it very clear that we do not intend to ever
extend that.
We advised the Ways and Means Committee of that. We didn't
write that legislation. In the compensation legislation we will
be marking-up, it is very clearly--it is one thing to be in the
Capital Purchase Program to be the recipient of funds, but in
the other programs, I do not think we should put those
restrictions on. I think the gentleman and I would agree, and
we will work together on that.
The Secretary gets tomorrow off. We will see you Thursday.
Mr. Bachus. Mr. Chairman--oh, he wanted to say something.
Secretary Geithner. Just, I look forward to Thursday. Thank
you.
The Chairman. Well, you weren't under oath when you said
that, so I am going to go by--
Mr. Bachus. As he leaves, could we ask that he and his
staff get up, but that everybody else will remain seated--
The Chairman. Yes. We are going to go two more rounds with
Mr. Bernanke, if we can do that.
And we now have the gentleman from California.
No, if you are going to leave, you leave right away, and
you don't come back. If you are leaving, you leave right away.
Mr. Bachus. Well, let--I think, if everybody will remain
seated until they get out.
The Chairman. The gentleman from California, I believe, is
next, Mr. Baca. Do you wish to question?
Mr. Baca. Yes, I guess along the same lines--I know that
Mr. Geithner just left--but we are still very much concerned
with the financial institutions receiving large payouts for
AIG, including nearly $12 billion each for Societe Generale in
France and Deutsche Bank in Germany, as well as $8.5 million
for Barclays in the United Kingdom.
How were these payouts meant to stabilize the United States
economy, and how can we recoup the American tax dollars?
Mr. Bernanke. Well, Congressman, again, many of the issues
and concerns that people have raised and are appropriate ones
boil down, again, to the lack of a resolution regime, which
means that we had really no alternative but to make good all of
the obligations of AIG, else they would have been in default
and in bankruptcy with the chaos that would have followed.
In this particular case, as I argued before, though, the
Europeans have also protected financial institutions. They have
not distinguished between American and European creditors. And
I think we need to work collaboratively with our partners
around the world to try to stabilize the global financial
system.
But, again, it is really a much broader issue of
stabilizing the overall system, not the specific
counterparties.
Mr. Baca. Right. And many of the people are really so
outraged with, I believe, $85 billion that has gone to AIG
executives receiving bonuses, whether it is in London or a
foreign country. What, if anything, is being done to reclaim
the American tax dollars? What are we doing? Can anything be
done to reclaim the tax dollars right now? And this is why the
public is outraged about. What is it that we can do? Why didn't
we have the oversight? Why didn't we have the accountability
before this even happened? It seems like we saw it, but we
didn't take any action. What can be done now?
Mr. Bernanke. Well, in terms of the collapse of AIG itself,
we didn't see it. Our regulatory system was not adequate, and I
believe it was not adequate to find the problem and identify it
and stop it in time.
I think, going forward, we need a stronger, comprehensive
holding company supervision plan, together with resolution
authorities that would allow us to wind down a firm like this
in this kind of circumstances. So I think there are important
financial reforms that need to take place.
With respect to getting the money back, again, we have put
a lot of money into AIG, it is absolutely true. But speaking at
least for the Federal Reserve, we think we have good
collateral; we expect to receive that money back.
Mr. Baca. You just mentioned that we were not adequately, I
guess, prepared. Why not?
Mr. Bernanke. Well, what we found in this crisis is that
through many, many parts of our financial regulatory system and
in our financial institutions we simply were not adequately
prepared for a crisis of this magnitude. And--
Mr. Baca. Why not, if we knew that there was loopholes?
Mr. Bernanke. I don't know the answer to that, Congressman.
And I guess it had to do with the design of the system and
omission of certain important areas.
Mr. Baca. Were we turning our ears or our nose and just
allow this process to happen? I mean, it seems like we knew it
was still coming, we weren't adequately prepared. We should
have been adequately prepared. Why is it that it still
happened? I mean, this is what is puzzling to the American
people.
Mr. Bernanke. So I think an absolutely critical part of the
deal here is that, if we are going to put out the fire in the
financial system, we also have to promise the American people
we are going to take the steps necessary that this will not
happen again. And that requires a very extensive rethinking of
our financial regulatory system as well as elements of our
financial system more broadly.
So I absolutely agree with you that we have to fix the
system, but it was broken and it did not succeed in the context
of this crisis.
Mr. Baca. When was it broken?
Mr. Bernanke. Well, evidently, in this particular case, I
think that, notwithstanding Mr. Polakoff--I admire him for
standing up and saying that it was his responsibility--but the
Office of Thrift Supervision is a small agency that specializes
in addressing the problems of thrifts. It was, in this case,
involved only because AIG owned a small thrift. Its main
concern is the protection of the thrift.
It is true, as he said, that he looked at some of these
elements in the AIG FP division, but I do think that, given the
size of the company and the risk being taken, a larger, more
effective, stronger, better-funded regulatory effort would have
been needed in order to identify these problems.
Mr. Baca. I understand where we need to go, but when was it
broken? Approximately when was the system broken, that it was
inaccurately--I mean, do we have a rough year, as to when?
Mr. Bernanke. Many different aspects of the system just
proved inadequate under the pressure of the crisis. And I can't
identify one specific cause for the crisis.
Mr. Baca. No, I am just trying to--because, you know, this
Administration is trying to clean up its act and I know, under
the leadership of our chairman, has come up with regulations,
accountabilities, and oversight. We never had this in the past
because we always stated that we didn't want to be
overregulated. But yet, in this case, we needed to be regulated
because the American people are the ones that are hurting right
now.
The Chairman. The gentleman from Florida.
Mr. Posey. Thank you, Mr. Chairman. And thank you for your
judicious handling of this committee in some kind of rough
words here.
The Chairman. Thank you.
Mr. Posey. You know, I don't want to beat a dead horse any
more. We have beaten a lot of dead horses today. I think what I
am looking for and really what my colleagues are really looking
for and our people back home are looking for is probably just a
big-picture approach, you know?
I think everybody is upset with what at least some of us
perceive is a crisis-of-the-day management of the situation.
They think this is a solution, and then, ``Oops, that is not
it; it is over here.'' And now we are going to have son of
TARP, grandson of TARP, great-grandson of TARP. You know, when
will it ever stop?
Most businesses would approach this, and I think most
prudent people, with a long-term plan, you know, a plan that
maps out the contingencies and just doesn't walk around every
day looking for more land mines, more bad reports, and more
changes in adjustment. And I haven't ever seen that.
You know, hopefully somewhere there is a flow chart that
says, ``Here is the direction we want to go. Here is what we
want to accomplish. And here is the way that we measure if we
are on task or not. If we have reached this point, we need to
do this. If we don't reach that point, these are the
contingencies.''
I think everybody would be so much more comfortable dealing
with this if we saw a real, legitimate plan, a timeline that
would let everyone note, the public as well, would provide a
transparency with where we have been, we know where we are, and
where we hope to go. But just shooting in the dark every day,
you know, crisis du jour, what is it today, what is the next
new plan that is going to solve all these problems, you know, I
really don't have much comfort in that, and I can't imagine how
anybody would.
So do you all--are you familiar with the plan, or are you
prepared to help us set forth on a plan? I mean, you know, we
wouldn't take a vacation without a road map. We wouldn't try to
leave the District, even try to get around the District right
now for me, without a road map. But we have no roadmap for the
financial future of this country, and it is really pretty
scary.
Mr. Bernanke. Well, Congressman, that is a very good
question. I am sure you appreciate how complex and difficult
this whole situation has been. I do think there is a plan.
First, I should mention the Federal Reserve has been very
aggressive on a lot of fronts, both in terms of lowering
interest rates, both short-term and long-term interest rates,
and providing liquidity to the system.
Secondly, the Treasury now has essentially a five-point
plan. It includes supervisory review and putting in capital,
buying assets off of balance sheets, the foreclosure mitigation
plan, and then the joint program with the Federal Reserve, the
TALF, which will help get the securitization markets going.
That covers all the major elements needed to get the banking
system going again.
But then, to make this all work for the future, in order to
avoid an AIG or a similar situation, we also have to very
seriously undertake a financial reform program. The Federal
Reserve has developed some proposals, which I talked about last
week. I know Secretary Geithner will be here on Thursday to
talk about the Treasury's proposals.
So I think there is a plan. If you have ever read books on
battles and warfare, you know that a lot of battles are very
chaotic at the beginning until the situation becomes clear and
the smoke starts to clear. I think we have gotten to the point
now where we can see the terrain, and we are taking the steps
necessary to stabilize the situation and get out of this
downturn we are in.
Mr. Posey. And I appreciate that, and I hope that most
betters are one with a good plan. But a five-point plan I kind
of see is just like we are going to throw these five Hail Marys
and we hope to make a touchdown or maybe five touchdowns. But I
would really like to see more detail. In other words, you know,
if the receiver, for whatever reason--your fault, my fault,
God's fault, his fault, nobody's fault--drops the ball, that
plan is out of the way. Now, where are we going to move that
plan, with that first Hail Mary--you know, what is the
contingency plan? And that is what I haven't seen unfold.
The lack of accountability--and a large part of the reason
that we are not here is we didn't measure stuff properly.
Usually, what doesn't get measured doesn't get done. It is the
same with production. If you don't measure something, it
usually means it is not important and it doesn't get finished.
And if we set out on a path to solve this crisis--and I believe
you all have the brains and the wisdom and the experience to do
it if we stay on task--the less politicized it is, the better,
and the less politicized it will be, the more clear your path
is.
But I think everyone needs to know what we expect to happen
tomorrow and the next day and the next week and the next month.
The Chairman. The gentleman's time has expired, and so has
the hearing.
I thank the Chairman and the president for their 3 hours
and 15 minutes.
We will begin with those members who stayed going first on
our side, in terms of Mr. Geithner on Thursday.
Mr. Bachus. Mr. Chairman, I would like to say that,
President Dudley, you did an outstanding job fielding all those
difficult questions today.
Mr. Dudley. Thank you, sir.
Mr. Bernanke. He is a fine man.
The Chairman. The hearing is adjourned.
[Whereupon, at 1:15 p.m., the hearing was adjourned.]
A P P E N D I X
March 24, 2009
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