[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
THE FEDERAL BAILOUT OF AIG
=======================================================================
HEARING
before the
COMMITTEE ON OVERSIGHT
AND GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
JANUARY 27, 2010
__________
Serial No. 111-107
__________
Printed for the use of the Committee on Oversight and Government Reform
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
http://www.house.gov/reform
THE FEDERAL BAILOUT OF AIG
THE FEDERAL BAILOUT OF AIG
=======================================================================
HEARING
before the
COMMITTEE ON OVERSIGHT
AND GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
JANUARY 27, 2010
__________
Serial No. 111-107
__________
Printed for the use of the Committee on Oversight and Government Reform
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
http://www.house.gov/reform
U.S. GOVERNMENT PRINTING OFFICE
63-136 WASHINGTON : 2011
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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM
EDOLPHUS TOWNS, New York, Chairman
PAUL E. KANJORSKI, Pennsylvania DARRELL E. ISSA, California
CAROLYN B. MALONEY, New York DAN BURTON, Indiana
ELIJAH E. CUMMINGS, Maryland JOHN L. MICA, Florida
DENNIS J. KUCINICH, Ohio MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts JOHN J. DUNCAN, Jr., Tennessee
WM. LACY CLAY, Missouri MICHAEL R. TURNER, Ohio
DIANE E. WATSON, California LYNN A. WESTMORELAND, Georgia
STEPHEN F. LYNCH, Massachusetts PATRICK T. McHENRY, North Carolina
JIM COOPER, Tennessee BRIAN P. BILBRAY, California
GERALD E. CONNOLLY, Virginia JIM JORDAN, Ohio
MIKE QUIGLEY, Illinois JEFF FLAKE, Arizona
MARCY KAPTUR, Ohio JEFF FORTENBERRY, Nebraska
ELEANOR HOLMES NORTON, District of JASON CHAFFETZ, Utah
Columbia AARON SCHOCK, Illinois
PATRICK J. KENNEDY, Rhode Island BLAINE LUETKEMEYER, Missouri
DANNY K. DAVIS, Illinois ANH ``JOSEPH'' CAO, Louisiana
CHRIS VAN HOLLEN, Maryland
HENRY CUELLAR, Texas
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
PETER WELCH, Vermont
BILL FOSTER, Illinois
JACKIE SPEIER, California
STEVE DRIEHAUS, Ohio
JUDY CHU, California
Ron Stroman, Staff Director
Michael McCarthy, Deputy Staff Director
Carla Hultberg, Chief Clerk
Larry Brady, Minority Staff Director
C O N T E N T S
----------
Page
Hearing held on January 27, 2010................................. 1
Statement of:
Barofsky, Neil M., Special Inspector General for the Troubled
Asset Relief Program; Thomas Baxter, general counsel and
executive vice president, Federal Reserve Bank of New York;
Elias Habayeb, former senior vice president and chief
financial officer, Financial Services Division, American
International Group, Inc.; Stephen Friedman, former
chairman, Federal Reserve Bank of New York................. 159
Barofsky, Neil M......................................... 159
Baxter, Thomas........................................... 176
Friedman, Stephen........................................ 212
Habayeb, Elias........................................... 199
Geithner, Timothy F., Secretary, U.S. Department of the
Treasury................................................... 18
Paulson, Henry M., Jr., former Secretary, U.S. Department of
the Treasury............................................... 133
Letters, statements, etc., submitted for the record by:
Barofsky, Neil M., Special Inspector General for the Troubled
Asset Relief Program, prepared statement of................ 162
Baxter, Thomas, general counsel and executive vice president,
Federal Reserve Bank of New York, prepared statement of.... 178
Connolly, Hon. Gerald E., a Representative in Congress from
the State of Virginia, prepared statement of............... 250
Friedman, Stephen, former chairman, Federal Reserve Bank of
New York, prepared statement of............................ 214
Geithner, Timothy F., Secretary, U.S. Department of the
Treasury, prepared statement of............................ 22
Habayeb, Elias, former senior vice president and chief
financial officer, Financial Services Division, American
International Group, Inc., prepared statement of........... 201
Issa, Hon. Darrell E., a Representative in Congress from the
State of California:
Information concerning derivative transactions........... 10
Prepared statement of.................................... 16
Kaptur, Hon. Marcy, a Representative in Congress from the
State of Ohio:
Memo dated October 2, 2008............................... 109
Talk sheet............................................... 58
Maloney, Hon. Carolyn B., a Representative in Congress from
the State of New York, letter dated March 4, 2009.......... 239
Paulson, Henry M., Jr., former Secretary, U.S. Department of
the Treasury, prepared statement of........................ 136
Towns, Chairman Edolphus, a Representative in Congress from
the State of New York, prepared statement of............... 4
THE FEDERAL BAILOUT OF AIG
----------
WEDNESDAY, JANUARY 27, 2010
House of Representatives,
Committee on Oversight and Government Reform,
Washington, DC.
The committee met, pursuant to notice, at 10:10 a.m., in
room 2154, Rayburn House Office Building, Hon. Edolphus Towns
(chairman of the committee) presiding.
Present: Representatives Towns, Kanjorski, Maloney,
Cummings, Kucinich, Tierney, Clay, Watson, Lynch, Cooper,
Connolly, Quigley, Kaptur, Norton, Davis, Van Hollen, Cuellar,
Welch, Foster, Driehaus, Chu, Issa, Burton, Mica, Duncan,
Turner, Westmoreland, McHenry, Bilbray, Jordan, Flake,
Fortenberry, Chaffetz, Schock, Luetkemeyer, and Cao.
Also present: Representatives Blunt, Bachus, and Stearns.
Staff present: John Arlington, chief counsel--
investigations; Beverly Britton Fraser, counsel; Lisa Cody,
investigator; Brian Eiler and Neema Guliani, investigative
counsels; Adam Hodge, deputy press secretary; Carla Hultberg,
chief clerk; Marc Johnson and Ophelia Rivas, assistant clerks;
Phyllis Love, Ryshelle McCadney, Christopher Sanders, and Alex
Wolf, professional staff members; Mike McCarthy, deputy staff
director; Amy Miller and Gerri Willis, special assistants; Leah
Perry and Steven Rangel, senior counsels; Jason Powell, counsel
and special policy advisor; Jenny Rosenberg, director of
communications; Joanne Sanders and Christopher Staszak, senior
investigative counsels; Leneal Scott, IT specialist; Shrita
Sterlin, deputy director of communications; Ron Stroman, staff
director; Lawrence Brady, minority staff director; John
Cuaderes, minority deputy staff director; Rob Borden, minority
general counsel; Jennifer Safavian, minority chief counsel for
oversight and investigations; Frederick Hill, minority director
of communications; Adam Fromm, minority chief clerk and Member
liaison; Kurt Bardella, minority press secretary; Seamus Kraft
and Benjamin Cole, minority deputy press secretaries; Tom
Alexander and Christopher Hixon, minority senior counsels;
Daniel Epstein, Chapin Fay, Hudson Hollister, and Mitchell
Kominsky, minority counsels; Brien Beattie, Molly Boyl, Alex
Cooper, Meredith Liberty, and Mark Marin, minority professional
staff members; Sharon Casey, minority executive assistant;
Stephanie Franco, minority press secretary and communications
liaison; Ashley Swope and Mike Whatley, minority staff
assistants.
Chairman Towns. The committee will come to order.
Good morning.
On September 16, 2008, the Wall Street giant AIG faced
immediate bankruptcy. AIG was saved from collapse when the
American people came to the rescue with an $85 billion bailout.
Less than 2 months later, the American taxpayer was again
forced to pay the bill when the Federal Reserve directed AIG to
hand out billions of dollars to counterparties that included
the biggest names on Wall Street.
In effect, the taxpayers were propping up the hollow shell
of AIG by stuffing it with money, and the rest of Wall Street
came by and looted the corpse.
The circumstances surrounding the payments to the
counterparties has created an air of suspicion and distrust
among the American people, starting with the New York Fed's
initial refusal to name the counterparties.
The New York Fed argued that disclosing these
counterparties would somehow injure AIG. In fact, when the
information was finally released under pressure from Congress,
nothing happened. It had absolutely no effect on AIG's business
or financial condition.
But it did have an effect on the credibility of the Federal
Reserve and it called into question the Fed's penchant for
secrecy. We need to change the culture on Wall Street and the
culture among the regulators, from secrecy to transparency,
recognizing that only truly confidential competitive or
consumer information should be protected.
As we sit here a year and a half later, after AIG handed
out billions in taxpayer dollars, because of this secrecy, we
still don't know why or how the decision to rescue AIG was
made, or who made the decision to offer AIG's trading partners
100 cents on the dollar in the so-called counterparty payments.
Every day in the business world, when a company is having
financial problems, its creditors have to take less money than
they are owed. Otherwise, they risk not getting any money at
all.
They call this a ``haircut.'' In the case of AIG, nobody
got a haircut. Instead, they were given a piggy bank full of
taxpayer dollars and said help yourself. Let me just say
plainly that I think just about every American would say the
government should have forced AIG's counterparties to take less
money.
Evidently, major decisions were made by a combination of
the Federal Reserve, the Federal Reserve Bank of New York, and
the Bush Treasury Department. Today, we will hear from
witnesses who were involved in making these decisions, and we
hope they can shed light on a murky set of facts.
Under subpoena, the committee obtained more than 250,000
pages of documents from the New York Fed detailing its handling
of the AIG counterparties. Particularly disturbing is the fact
that these emails indicate that AIG proposed to disclose to the
SEC and the public the names of the counterparties and the
payments. But it was the New York Fed that directed AIG to
withhold this information. As one New York Fed staffer put it,
``any public disclosure by AIG is still subject to Fed
approval.''
At least two things are clear here: The entire financial
regulatory system was broken, and there shouldn't be any more
bailouts. The lack of transparency we have seen in the double
bailout of AIG leads to distrust, which leads to anger.
The question that looms over all of this: How do we prevent
a repeat of this financial crisis in the future? Unless the
Congress adopts genuine financial services reform, it will be
only a matter of time before we see another AIG, another Bear
Stearns, another Lehman Brothers, and the next big bank will be
``too big to fail'' and the taxpayers will wind up footing the
bill again and again and again.
I ask my Republican colleagues on this committee to join
with me in fixing the system. Blame is about yesterday. Fixing
the system is about today and the future.
In the AIG case, we can talk all we want to about
complicated business deals, but this all boils down to a simple
concept: when average people were losing their homes and jobs,
the same big banks that caused the problems got every dollar
back, courtesy of the American taxpayer. And the Federal
Reserve tried to keep important information a secret.
Secrecy leads to distrust. And the American people now
distrust what happened in these bailouts. Congress has the
right to know how and why that happened and the American people
have the right to know how and why that happened.
I hope that today we can get answers to these and other
important questions.
[The prepared statement of Chairman Edolphus Towns
follows:]
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Chairman Towns. I now yield to our ranking member, the
gentleman from California, Congressman Darrell Issa for his
opening statement.
Mr. Issa. Thank you, Mr. Chairman. You have our promise
that this has been and will continue to be a bipartisan
oversight of these and all the issues related to the Fed's
current and future authority.
Mr. Chairman, I would like to ask unanimous consent,
pursuant to our rules, that Spencer Bachus, the ranking member
on Financial Services Committee; Kevin Brady of Texas, the
ranking House Republican on the Joint Economic Committee; Roy
Blunt, the former Whip; Ron Paul, whose credentials on this are
well understood; and Cliff Stearns of Florida be allowed to sit
on the dais and, should there be time, allowed to ask questions
pursuant to the rules.
Chairman Towns. Without objection.
Mr. Issa. Additionally, I would ask, at this time, to
submit for the record Schedule A, which is in fact the
shortfall agreements between Maiden Lane III and AIG Financial
Products, since they will be referred to in questioning, and we
want to make sure they are officially in the record.
Chairman Towns. Reserving the right to object.
Mr. Issa. OK.
[The information referred to follows:]
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Mr. Issa. Additionally, Mr. Chairman, I would ask unanimous
consent that the eight letters previously sent to Secretary
Geithner and, as of today, not responded to also be placed in
the record at this time, although they will not be reviewed
further during this hearing.
Chairman Towns. Reserving the right to object.
Mr. Issa. Thank you, Mr. Chairman.
Thank you, Mr. Chairman, for all of this and more. Working
together with you on the subpoena documents has caused both the
majority and minority to glean considerable new information.
In recent weeks, this committee, receiving these documents
have caused us to better understand the New York Fed pressured
AIG to abort negotiations designed to obtain a haircut, as it
was called, from its counterparties and keep the details of the
counterparties' payments from appearing on the firm's forms at
the SEC.
Today, one of the questions we will ask is should the
American people be kept from knowing until 2018 the details of
who were the ultimate beneficiaries of this bailout.
As I have said before, I consider this a back door bailout.
The people giving us testimony today will tell us that they
felt that this was essential and necessary. Mr. Chairman, as
you can recall, AIG's founder, Hank Greenberg, has previously
testified, along with AIG CEO Edward Liddy. And in that
testimony Hank Greenberg made it very clear that he believed
that: one, hedging should have occurred sooner; and, two,
bankruptcy would have been a cleaner way to resolve a company
in which he is the largest stockholder.
I am proud to say, after that hearing, AIG has re-engaged
their founder to help them maximize the value of a company that
is currently 80 percent owned by the American people.
Not to say that there is a lot of good news at AIG. Mr.
Chairman, it is clear that the money paid and it being kept
secret may ultimately cause the American people never to be
repaid these dollars.
Can you hear me OK now? You can't? OK. Now. OK, I will
focus on this mic this time. Usually the problem is I am too
well heard, right, Mr. Chairman?
Chairman Towns. Generally.
Mr. Issa. Today we will have an opportunity to ask
questions and the American people will have the right and I
believe will receive straightforward answers.
So far, Mr. Chairman, this is what we know. We know that
some of today's witnesses played a central role in the decision
to bail out AIG, rather than allow the normal bankruptcy
procedures to run their course. We know that one of today's
witnesses made the decision to pay AIG counterparties at 100
cents on the dollar. We know that one of today's witnesses was
the primary architect of the AIG Trust Agreement, whereby the
taxpayers' investment in AIG is managed not in the interest of
the U.S. taxpayers, but of the U.S. Treasury Department. That
was from previous testimony and we rely on that to say perhaps
that is not the right answer.
We know that the New York Fed sought to cover the
counterparty payments made possible by the taxpayers' money. We
now better understand that the New York Fed transferred their
earlier responsibility to the American people after TARP was
passed. We know that the New York Fed succeeded in getting the
SEC to continue the cover-up until 2018, 10 years from the date
the bailout began. And we know that the full amount paid to
AIG's counterparties will likely never be repaid to the
American people.
Some facts, Mr. Chairman, remain unknown or uncertain.
Secretary Geithner has claimed publicly that he recused himself
from the day-to-day management of the New York Fed when the
cover-up occurred. In fact, he has asserted complete ignorance
of the Fed's efforts to cover up the bailout details. Many
people, including members of this committee, have a hard time
believing that Secretary Geithner entered into an absolute cone
of silence--for those of us old enough to remember what that
was--on the day his nomination was announced. Where was
Secretary Geithner for the months and months that back door
bailouts were being questioned in the media? Did he ever wonder
why his decision to pay AIG's counterparties was kept secret
for so long?
These are the questions the American people deserve.
Mr. Chairman, I would ask unanimous consent the remainder
of my opening statement be placed in the record at this time.
Chairman Towns. Without objection, so ordered.
Mr. Issa. Thank you, Mr. Chairman. I yield back.
[The prepared statement of Hon. Darrell E. Issa follows:]
[GRAPHIC] [TIFF OMITTED] T3136.010
[GRAPHIC] [TIFF OMITTED] T3136.011
Chairman Towns. I thank the gentleman from California.
At this time we would like to turn to our first witness,
Treasury Secretary Geithner.
It is committee policy that all witnesses are sworn in, so,
Mr. Secretary, if you would stand and raise your right hand.
[Witness sworn.]
Chairman Towns. Let the record reflect that he answered in
the affirmative.
You may be seated.
STATEMENT OF TIMOTHY F. GEITHNER, SECRETARY, U.S. DEPARTMENT OF
THE TREASURY
Secretary Geithner. Chairman Towns, Ranking Member Issa,
members of the committee, thank you for the opportunity to
testify before you today. I welcome the committee's attention
to this issue, and we will continue to work closely with this
committee, with all other oversight bodies----
Chairman Towns. Mr. Secretary, pull the mic just a little
closer. We are having a little trouble.
Secretary Geithner. I am almost eating it.
Chairman Towns. I know.
Secretary Geithner. How does that sound?
Chairman Towns. Shows you how our sound system is not too
good around here. We keep making budget cuts.
Secretary Geithner. I don't think I can make it any closer.
I want to make sure that the American people have a
comprehensive view of the actions we took to end this financial
crisis.
Deciding to support AIG was one of the most difficult
choices I have ever been involved in in over 20 years of public
service. The steps that were taken were motivated solely by
what we believed to be in the public interest. We did not act
because AIG asked for help. We did not act to protect
individual institutions. We acted because the consequences of
AIG failing would have been catastrophic for our economy and
for American families and businesses.
More than a year removed from that terrible week of
September 2008, I believe that the Government's strategy--and
it was the Government's strategy--was the best of the available
options and will ultimately cost the taxpayer far less than
many feared and far less than many alternatives many people
suggest today would have been better. And, importantly, if you
join with the President in adopting his proposed financial
responsibility fee, American taxpayers will not have to pay one
cent for the actions we took in AIG or the actions we took with
the authority Congress gave the administration to stabilize
this financial crisis.
AIG's problems became acute just a few days before Lehman
declared bankruptcy. At that time, our financial system and our
economy stood at the brink of collapse. The banks and financial
institutions that Americans rely on to protect their savings,
to help finance their children's education, to help pay their
bills were risks which few Americans had ever experienced. The
banks and the financial markets that businesses rely on to meet
payroll, to build inventory, to fund new investments, to create
new jobs were threatened like at no time since the Great
Depression. Across the country, across the United States of
America, people were rapidly losing confidence in our financial
system and in the Government's ability to safeguard their
economic security.
In the midst of this storm, AIG posed a much greater threat
than Lehman. AIG was much larger; it was spread across the
globe; and its failure would have been far worse, hitting
Americans in ways Lehman could not. AIG was one of the largest
life and health insurance companies in the country, one of the
largest property and casualty insurers, providing insurance to
180,000 small businesses and other corporate entities which
together employed about 100 million people. AIG had sold
products to protect local and city governments, pension funds,
and thousands of public and private companies through
guaranteed investment contracts and protection for 401-Ks. And,
as problematic, AIG had engaged in a broad range of financial
activities that strayed well beyond traditional insurance
businesses.
Using a credit rating based on the strength and
profitability of its insurance companies, it had become one of
the largest providers of complicated financial products in the
world. It made hundreds of billions of dollars of financial
commitments without the resources to back up those commitments.
AIG should have never been allowed to take those risks, but it
was. Its insurance regulators in 20 different States, their
regulators in other countries responsible for overseeing their
international activities, and its holding company supervisor,
the Office of Thrift Supervision, did not act to constrain the
risks AIG was taking.
Important to recall that the Federal Reserve was given no
responsibility and no authority to contain risks that AIG was
taking. No one acted to constrain risks taken by AIG, and none
of those regulators, in the moment of crisis, had any ability
to respond to its failure.
The Government of the United States did not have the
ability to seize AIG and wind it down in an orderly way, as the
FDIC can and does for banks. Neither the bankruptcy code nor
insolvency procedures for insurance companies could have
handled the job. And there was no way to draw a line around AIG
and prevent its failure from wreaking havoc across the system.
The Federal Reserve was at the center of response to the
crisis because it was the only fire station operating. The
Federal Reserve faced a terrible choice: to support AIG,
putting billions of dollars of taxpayer resources at risk, or
to let AIG fail and accept potentially catastrophic damage to
the economy. We were not willing to accept such a catastrophe.
So just 4 days after the Federal Reserve was drawn into
that crisis, the AIG crisis, we extended AIG a line of credit
secured by its insurance businesses. In return, the taxpayer
took about an 80 percent stake in the company and began the
process of restructuring management and the board and the firm
itself. That initial action helped stem the bleeding for a
time, but given the massive losses AIG faced, and given the
force of the storm moving across the global financial system,
it was not enough, and we had to work very quickly almost from
the beginning to design and implement a broader, more permanent
restructuring.
AIG needed capital, not just a line of credit, and AIG's
vulnerability to future losses, to the bleeding of cash had to
be reduced.
On November 10th, the Federal Reserve and the Department of
Treasury jointly announced a series of steps designed to
stabilize the company. The Treasury invested $40 billion of
preferred capital under the authority Congress provided the
executive branch under the TARP, and the Federal Reserve helped
establish and fund two entities, called Maiden Lane II and III,
to purchase a range of assets from the company that were
threatening AIG's financial solvency. Maiden Lane III, in
particular, has been the subject, appropriately, of a range of
questions about how we treated firms that had bought these
insurance contracts from AIG, and in this effort--and I want to
make this very clear--in this effort, our objective was, as
always, to get what was the best deal for the American
taxpayer. And we faced a number of options.
If we had let AIG default on the contracts, AIG would have
gone into bankruptcy, triggering all the disastrous economic
consequences we had feared since September that led the
Government to act initially. If we had continued to lend AIG
money to meet these obligations, its growing debt would have
led to a credit rating downgrade, bringing down the firm itself
and putting more taxpayer dollars at risk. If we had tried to
force counterparties to accept less than they were legally
entitled to, market participants would have lost confidence in
AIG, leading to the company's collapse. The counterparties
could have refused, they could have kept the billions in
collateral they had already taken; they could have kept the
billions in securities they already had; and they could have
sued AIG for breach of contract.
We did not have the luxury of time. We could not engage in
protracted negotiations. AIG's financial position was
deteriorating rapidly day by day. The prospect of failure was
imminent. So we restructured those contracts to stop the
bleeding and potentially recover some value for the taxpayer in
the future.
Now, although the Government still faces the risk of
substantial losses in its overall exposure to AIG, we expect
that this particular transaction, the very one that is the
heart of so much controversy, will be paid off in full with
interest, generating some profit for the American taxpayer.
Now, on November 24th, after President Obama announced his
intention to nominate me for Secretary of the Treasury. And
after broad consultation with the chairman of the Federal
Reserve and others, I decided to stay on as president of the
New York Fed on an interim basis, but I withdrew from monetary
policy decisions, policies involving individual financial
institutions, and day-to-day management of the New York Fed. I
had no role before or after November 24th in making decisions
regarding what to disclose about the specific financial terms
of Maiden Lane II and III and payments to AIG counterparties.
Mr. Chairman, the broad strategy that the Government
adopted to contain this financial crisis has been remarkably
effective at stemming the crisis, breaking the momentum of the
crisis, and repairing the damage, and this has been achieved at
much lower cost in taxpayer resources than many people
anticipated. Confidence in the basic stability of the American
financial system is much stronger today. Borrowing costs for
American businesses and consumers, for households, for
municipal and State governments have fallen dramatically. The
economy is now growing. The support we provided to AIG in the
context of the broad strategy to put out this financial fire
was essential to achieving this early beginning of healing and
recovery.
Banks have already repaid two-thirds of the TARP
investments that my predecessor appropriately made. The only
support this administration has provided to banks since I took
office--to banks--was $7 billion to regional small community
banks. More than 75 percent of the emergency Government
guarantees that I inherited when I took office have now been
shut down and closed at a profit to taxpayers. Over the last
year, the expected cost of stabilizing the financial system has
fallen by over $400 billion. That is real resources that we can
use to meet the many other challenges we face as a country. And
if Congress joins with us in adopting the President's proposal
for a financial responsibility fee, the American taxpayer will
recoup every penny of potential losses under the TARP.
Now, this economy is still in crisis, but because of the
Government's actions the American financial system is now in a
position where it can provide the credit necessary for economic
growth, and that is essential to lay the foundation for job
growth and long-term economic prosperity.
Now, let me close by saying this. If you are outraged by
AIG--and you should be--if you are outraged by what happened
with AIG, then you should be deeply committed to financial
reform. The United States of America should never have let
institutions like AIG take on a level of risk that could
threaten the stability of the financial system. And the
Government of the United States should never have been in the
position of going into a crisis of this severity without the
basic tools able to contain the damage and protect the
taxpayer.
So I hope you will join us in working to put in place a
strong package of financial reforms that will protect
consumers, protect investors, protect the taxpayer, and protect
our economy from excessive risk taking by financial
institutions.
Mr. Chairman, one final thought. The public servants
involved in making these decisions acted solely in the public
interest, acted solely in the interest of the American
taxpayer. They are dedicated Americans who bring to government
service enormous experience and the highest integrity. I would
never, and they would never, be part of any decision, any
public decision intended for private benefit and not the public
interest.
The decisions we made together regarding AIG were
enormously consequential; they were terribly difficult; they
were the subject of extraordinary controversy within each of
the institutions responsible. And for that reason they were
subject to enormous care and deliberation. But I believe a fair
reading of history, a careful fair reading of history of all
the judgments we made, will demonstrate that the actions we
took--and I was there--were essential to preventing broader
catastrophe, and the solutions we took reduced the ultimate
cost of the American taxpayer and the American economy is much
stronger today as a result.
Thank you very much.
[The prepared statement of Secretary Geithner follows:]
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Chairman Towns. Thank you very much, Mr. Secretary.
Let me begin by asking a couple of questions. Were you
involved in any discussions with AIG, or your staff involved,
where you discussed what AIG should or should not disclose to
the public?
Secretary Geithner. Mr. Chairman, as I said, I had no role
in making those decisions. But as the record shows, and the
record before the committee shows, a large number of people at
the Federal Reserve Bank of New York and the Federal Reserve
Board in Washington played a very active role in thinking
through those difficult choices.
Chairman Towns. But I am not sure I got an answer there.
Secretary Geithner. Let me say again. I personally played
no role before the 24th or after in making those decisions. But
you asked whether any employees of the New York Fed did. Of
course they did.
Chairman Towns. When you were the president of the Federal
Reserve Bank of New York, when did you recuse yourself from
matters involving specific companies and why did you recuse
yourself?
Secretary Geithner. On November 24th, the President
announced his intention to nominate me as Secretary of the
Treasury. That forced me to make a set of decisions about what
was appropriate for me to do, given the unique circumstance at
that time.
And after consulting with the chairman of the Federal
Reserve, with the chairman of my board, with my general
counsel, and with a range of other officials, collectively we
decided that it was in the best interest of the Fed and the
incoming administration for me to remove myself from day-to-day
involvement in the Fed's policy issues, to leave that
responsibility to my colleagues at the New York Fed, led by the
executive, the first vice president of the New York Fed, but
not to step down as president.
And we made that decision because we wanted to make sure we
were protecting the independence of the Fed and because I was
going to be spending, by necessity, a huge part of my time in
helping shape the President's economic agenda, and I was not
going to be able to give the care and effort needed to carry on
running the Fed on a day-to-day basis. Our judgment was that
was the best decision at the time. I am confident of that in
retrospect. It was unique. It was unique, but I don't think
there was a better alternative available.
Chairman Towns. Secretary Geithner, I don't think AIG's
counterparties should have been paid 100 cents on the dollar,
because in this email we have here--it is on the screen as
well--you had some interest in how much the counterparties were
owed. Please tell the committee what impact the counterparties'
exposure had on your decision to pay 100 cents on the dollar.
Secretary Geithner. Mr. Chairman, that played no role in
our decision. As I said in my opening statement and as I have
testified before, we had to make a difficult choice about what
was going to prevent the failure of the firm at least cost to
the taxpayer. If we had broken those contracts, if AIG had not
paid them in full, if we had threatened default, if we had
imposed haircuts, if we had selectively imposed haircuts, that
would have brought about a downgrade in its rating, the firm
would not have been able to operate, and it would have
collapsed. It was because of those choices we took the path we
did, to restructure the contracts and leave the taxpayer with
some of the potential upside in those securities.
Now, judging what is systemic and why a failure of AIG
might matter for the system as a whole is a very difficult
judgment to make; there is no black and white choice in that
context. But our judgment was, as I said in my testimony, that
AIG's collapse would have dramatically magnified all the
effects you saw in the immediate aftermath of Lehman's failure,
and in some ways they would have been more consequential
because they would have spread to a set of insurance
businesses, and that would have been much worse for the
country. So we were guided by a simple but terrible choice: how
best to prevent default at least cost to the taxpayer.
Chairman Towns. Thank you very much, Mr. Secretary.
I now yield to the gentleman from California, the ranking
member, Congressman Issa, for 5 minutes.
Mr. Issa. Thank you, Mr. Chairman. I am going to pick up
pretty much where you left off.
Secretary Geithner, I think you have answered that you
played no role in the decision to not disclose the full
payment, the 100 percent payment, to the counterparties, that
you were not part of what some of us have called a cover-up. Is
that right?
Secretary Geithner. Absolutely.
Mr. Issa. OK. Let me followup, then. If, after November
24th, you were not involved in any activity, then one more just
to be clear. Did you ever become involved with the Federal
Reserve's disclosure decision with respect to AIG counterparty
claims after your nomination as Treasury Secretary? In other
words, have you ever participated or questioned or stayed
involved with that?
Secretary Geithner. No, I did not.
Mr. Issa. Well, from what we were given by the Fed, could
we put up slide 1? This email from you says--to William Dudley,
your replacement, on March 2009--OK, it is easier to read on
the screen--Where are you on the AIG counterparty disclosure
issue? Long after you left you made this email. What was it
about and what was the answer?
Secretary Geithner. Well, Congressman, as you know, this
question of disclosure was the subject of a huge amount of
controversy and most people----
Mr. Issa. You think?
Secretary Geithner. Yes. That is what my son says, and I
agree with you. And I think most people feel as you do, they
said why shouldn't it be disclosed? Why shouldn't it be
disclosed? And, as you know, in March--which I think, if I am
not mistaken, was the time of this email----
Mr. Issa. Yes, March 15th.
Secretary Geithner [continuing]. It had been subject of
testimony by the vice chairman of the Federal Reserve, and the
Federal Reserve was facing a huge amount of pressure and
attention over what it disclosed. So I assume I was doing what
you might expect in that context in asking them where were
they, were they going to change their position.
Mr. Issa. OK. Well, then, following up on your continued
involvement looking at them, where are you on this? Do you
believe that there should be full disclosure, as the President
has said that these kinds of instruments should be public, that
essentially, they be like any other instrument, the details of
which should be available broadly?
Secretary Geithner. Congressman, I believe deeply that
trust and confidence in the financial system requires
disclosure and transparency. I believe that trust and
confidence in the Government requires that our actions be
subject to full exposure and review by careful independent
analysis. And I have been very, very supportive, since I came
into office and before, to making sure we were bringing an
unprecedented level of disclosure to the transparency around
the actions of the Government. I will just give you a few
examples.
When I came into office, we put the financial terms of all
of the transactions we undertook under the TARP in the public
domain for everyone to see. One of the reasons our financial
strategy has been successful in bringing a measure of stability
back to our system is we compelled the largest institutions in
the country to subject their balance sheets to a level of
disclosure----
Mr. Issa. Well, Secretary, I appreciate what you have been
doing as Treasury Secretary, but I have in front of me from the
Fed, marked confidential, the details of who benefited, who got
these benefits, and currently it is locked up until 2018 by an
order that wasn't negotiated and final until May of this year--
May of last year, long after you were obviously able to be
involved, that locks up the public knowing, and these are
assets the American people have paid for in full, right? Do you
believe that we should know about these?
Secretary Geithner. Congressman, that is an issue that I
think you need to direct to the New York Fed and to the SEC.
Mr. Issa. OK. Well----
Secretary Geithner. You asked me a question that I didn't
quite get a chance to answer before, which is you said what was
my view, in effect----
Mr. Issa. Yes.
Secretary Geithner [continuing]. Of what the Fed ultimately
did. It is very important to recognize that the Fed did, in
March 2009, fully release information of the counterparties and
the details of that transaction, and based on what I know, I
thought the decision was appropriate then. Now, I know a lot of
people have said shouldn't that have come sooner I think
reasonable people could come to that judgment, but I did not
stand in their shoes.
Mr. Issa. Now, as a member and the head of the New York
Fed, and also, I guess, broadly a member of the board
generally, until you were sworn in----
Mr. Kucinich [presiding]. The gentleman's time has expired.
Mr. Issa. I will just finish up this one question, Mr.
Chairman, very quickly.
You were aware that Chairman Bernanke, in fact, had in
front of him from the staff a report that said AIG should be
allowed to go bankrupt, which was then held back on September
16th based on his decision on September 15th not to disclose
this for a broad vote of the board, weren't you?
Secretary Geithner. I am not aware of the email that you
are referring to, but I am aware of the----
Mr. Kucinich. The witness may answer the question and then
we are going to move on to the next questioner.
Secretary Geithner. Thank you.
Every decision we made in the days before September 16th
and afterwards were enormously controversial----
Mr. Issa. No, no.
Mr. Kucinich. The gentleman's time has expired.
Mr. Issa. I understand.
Mr. Kucinich. The Chair recognizes Mr. Kanjorski.
Mr. Issa. I would ask unanimous consent to just get an
answer to the question. It would be very quick.
Mr. Kucinich. Well, each Member has 5 minutes. We will--
without objection, the witness can answer the question, then we
will move.
Mr. Issa. The only question we want is were you aware of
that? And if you weren't, do you think you should have been
aware of that for a vote on September 16th? That's all.
Secretary Geithner. Well, I was aware that there was
enormous concern both in the New York Fed and at the Federal
Reserve Board about the choices we were confronting. As I said,
there is nothing more controversial and difficult than I think
any we faced in this context, and I think it should be
reassuring and no surprise that those actions--and the record
will show that those actions were the subject of enormous
debate, and they were the subject of debate before the 16th and
afterwards, and every time we faced the possibility of having
to do more, we all stepped back and said do we really need to
do that, does that make sense? And that is a good thing for the
country, that you had people willing to debate that and argue
it forcefully.
Mr. Kucinich. Thank you.
The Chair recognizes Mr. Kanjorski.
Mr. Kanjorski. Thank you very much, Mr. Chairman.
Mr. Secretary, there is a famous expression. I think it
comes from one of the fine poets of our era: We have come to
bury Caesar, not to praise him. And I hope you appreciate the
role of Caesar that you are playing today. But it made me think
about the fact that last Sunday I watched the ball game and in
the closing moments of the ball game the quarterback made a
tremendous decision to pass the football and got intercepted.
And, as a result, the opposing team took the ball down the
field, kicked a field goal, and won the game. And I convened
several meetings in New York after that game and met
extensively on Monday and Tuesday, and we have concluded that
he just did the absolute worst thing that he could have done.
Every one of us at those meetings would have made the correct
decision after the fact.
I think the point I am trying to make is I do share some of
the sympathies with you because I was on the committee and the
task force that was working with the Secretary and with the
chairman of the Federal Reserve when the crisis occurred, and I
caution some of the members I think even of this committee were
AWOL for the votes that we needed to authorize the saving of
the American economy.
As I have heard your testimony, you have come to the
conclusion that if the rescue package had not been passed by
the Congress of the United States authorizing the Secretary and
the President to take extraordinary action and commit hundreds
of billions of dollars of taxpayers' money, we wouldn't be
sitting in this room today. We probably wouldn't be operating
under the Constitution that was saved as a result of that
precipitous action taken in a very short period of time. Is
that relatively correct?
Secretary Geithner. I completely agree. And those Members
of Congress on both sides of the aisle that voted to authorize
that action did the right and the necessary and the courageous
thing, and they made it possible for my predecessor and the
Federal Reserve to start to stabilize this thing. And it would
not have been possible without that authority and without that
legislation.
Mr. Kanjorski. I appreciate that. I sometimes--as a matter
of fact, I took that argument to the White House at that time.
If you remember, the President was not as outspoken, and I
always was convinced that in a democracy such as ours,
transparency, both in bad news and dangerous news, must be
shared with the people. And part of the problem at that time,
we didn't share that news. And even to today, most people in
this audience and most people throughout America have no idea
how close we came to total annihilation and disaster. Is that
correct?
Secretary Geithner. That is my view. I think for the first
time since the Great Depression you were seeing a full scale
run on the financial system. People were taking their savings
out of banks. They wondered whether a dollar was a dollar;
whether their dollar in a money market fund would be worth a
dollar. They worried about whether a dollar lent to a AAA
company would be worth a dollar. It was a basic calamitous
breakdown in the fabric of our system and no recovery would
have been possible without starting to stabilize the system and
stem the bleeding, and that was something that could not happen
without the authority that, as I said, many people in this
room, many people on both sides of the aisle voted to approve.
Mr. Kanjorski. Am I correct that there were discussions
held at the highest echelons of the U.S. Government and the
Congress at that very time as to whether or not law and order
could be secured in the United States if we did not take
precipitous actions to assure the people that the economic
markets in the United States and the world would be held
secure?
Secretary Geithner. I was not in the executive branch at
that time, so I can't speak to that, but it would not surprise
me if that was the case. Again, this was the gravest crisis we
had seen since the Great Depression. It was not going to solve
itself. Many people advocated we should let it burn itself out,
but that would have been catastrophic for the economy. We are
still living with the consequence of the damage and the
wreckage. The scale of the challenges we face today as an
economy are rooted in that crisis and they illustrate the force
of the pressure and the momentum that was already--we were
already living with in August of that summer.
Mr. Kanjorski. All the decisions made in those fateful 2
weeks weren't the correct decisions, were they?
Secretary Geithner. Oh, Congressman, I think every day
about things we could have done differently and done early, and
I think a great strength of this country is that people in the
Congress, in independent oversight bodies, in the financial
crisis commission were all going to take a cold, hard look at
everything that was done, and that will give us a better
basis----
Mr. Kucinich. The gentleman's time has expired. You may
continue with your answer.
Secretary Geithner [continuing]. And that will give us a
better basis for fixing this mess and preventing it from
happening again, and we will cooperate fully in all that
effort.
Mr. Kanjorski. Thank you, Mr. Chairman.
Mr. Kucinich. I thank the gentleman.
The Chair recognizes Mr. Burton.
Mr. Burton. Thank you, Mr. Chairman.
Your counsel, one of your counsels, James Bergen, said on
March the 12th, I don't know if there is any way to manage it
so that Congress won't ask for it or, if they do, won't release
it. Does he work for you, or did he work for you?
Secretary Geithner. Yes, he did.
Mr. Burton. Does your legal counsel have the authority to
make comments and decisions without your knowledge?
Secretary Geithner. Of course. But----
Mr. Burton. Regarding something of this import?
Secretary Geithner. Well, as president and CEO of the New
York Fed, of course, I was ultimately responsible----
Mr. Burton. This doesn't require a long dissertation.
Secretary Geithner. No, it's not a long----
Mr. Burton. All I want to know is do they have the
authority to make these kinds of comments and decisions without
you knowing about it.
Secretary Geithner. Of course.
Mr. Burton. On November the 11th, when you were still at
the Fed, an internal memo said, as a matter of course, we do
not want to disclose that the concession is at par unless
absolutely necessary. Are you familiar with that memo?
Secretary Geithner. Not with that email. As I said, I was
not involved in decisions about what to disclose about the
individual transactions or the names of counterparties. But I
have enormous trust and confidence in the integrity and
judgment of people who were.
Mr. Burton. On March the 15th, after that, we had up on the
board there a few minutes ago the email to Mr. Dudley that said
where are you on the counterparty disclosure issue? And Dudley
responded, my understanding is that it is in train and could
come out as early as today. Are you familiar with that?
Secretary Geithner. I don't recall his response, and I
didn't recall my email until you put it in front of him, but
now I see it.
Mr. Burton. You don't remember that?
Secretary Geithner. No, I don't, but I do remember at the
time there was still enormous building pressure on the Fed to
disclose and they did disclose.
Mr. Burton. But you still maintain that you weren't
involved in any of this?
Secretary Geithner. Yes, absolutely.
Mr. Burton. Were you aware that all of these organizations
around the world, Societe Generale, Goldman Sachs, Merrill
Lynch, Deutsche Bank, UBS, were all getting 100 cents on the
dollar?
Secretary Geithner. Absolutely.
Mr. Burton. You were aware of all that? Why wasn't this
disclosed back in November, when you were head of the Fed?
Secretary Geithner. Well, again, that is a question you
need to direct to the people who were responsible for that
judgment.
Mr. Burton. Well, you were the head of the Fed.
Secretary Geithner. I was the head of the Federal Reserve
Bank in New York until I was confirmed by the Senate for this
job.
Mr. Burton. Why wouldn't this have been disclosed by you
back then? I mean, you are saying that--what, was this a group
that made the decision?
Secretary Geithner. Congressman, I don't know how to say it
any differently, but when the President announced his intention
to nominate me, I withdrew, appropriately, from a whole range
of policies decisions of the Federal Reserve Bank of New York
in part to protect the Fed, in part so I could do my job of
helping the President prepare for how to fix the mess we
inherited. Now, because of that I was not involved in those
decisions. But I want to say the people who made those
decisions did so----
Mr. Burton. This happened on November the 11th, before you
withdrew.
Secretary Geithner. What happened on November----
Mr. Burton. This knowledge.
Secretary Geithner. Oh. Mr. Chairman, as I said in my
testimony, I wasn't----
Mr. Burton. Why wasn't it disclosed back then?
Secretary Geithner. Well, we didn't face that choice then.
I was directly involved in the judgments that we collectively
made----
Mr. Burton. You didn't face the choice back then?
Secretary Geithner. No, we didn't. No. But the choice that
I was deeply involved in, fully support, believe was the right
choice was the decision to restructure these contracts in a way
that was better for the taxpayer and prevented the fall of the
company. I was fully supportive of that, fully aware of that.
Mr. Burton. It stretches credulity for us to believe that
you had no role in this and didn't know anything about it when
your attorneys and people that worked for you were sending
emails all around the place, and you were the head of the Fed
and you didn't know anything about it? It just doesn't make any
sense to me, and I think a lot of my colleagues feel the same
way.
Secretary Geithner. Congressman, I was president of the New
York Fed throughout that time. I was--we were involved, as you
know, in an extraordinary complicated range of things.
Mr. Burton. But this is major stuff.
Secretary Geithner. The decisions around AIG were major and
hugely consequential, and they were done with enormous care and
judgment. But the choices around disclosure, which
understandably are the focus of so much attention, are not
judgments I could speak to.
Mr. Burton. Let me just finish by asking you this. Do you
think that there ought to be an annual audit of the Fed?
Secretary Geithner. I am very supportive----
Mr. Kucinich. The gentleman's time expired, but, Mr.
Secretary, you may answer the question.
Secretary Geithner. I am very supportive, as part of
financial reform, of trying to make sure that the Fed is
subject to an aduate level of transparency and disclosure and
oversight, and the chairman of the Federal Reserve has worked
with many Members in Congress in helping shape reforms that
would achieve that outcome.
Mr. Burton. I'll take that as a yes.
Secretary Geithner. In doing that, though----
Mr. Burton. I'll take that as a yes.
Secretary Geithner. In doing that, though, I want to be--it
is very important we protect the independence of the Federal
monetary policy issues. It would be a deep mistake for the
country, a grave mistake for the country to threaten that
independence.
Mr. Kucinich. The Chair recognizes Mr. Cummings. You may
proceed.
Mr. Cummings. Secretary Geithner, I don't know whether you
realize this, but it was the Democrats that asked for this
hearing. I specifically asked for this hearing. Did you know
that?
Secretary Geithner. I believe I did know that.
Mr. Cummings. And let me tell you that when I asked for the
hearing, I must tell you that I was extremely concerned and I
was questioning whether you had acted appropriately. And I
think anyone who read headlines back then, when this hearing
was requested, would have come to at least the question mark.
Now, you sat here a few moments ago and you swore that you
would tell the truth, is that correct?
Secretary Geithner. I did.
Mr. Cummings. Is that correct?
Secretary Geithner. I did.
Mr. Cummings. And I assume that the statement, your written
statement is a statement which you would also swear to?
Secretary Geithner. Absolutely.
Mr. Cummings. And I can tell you that as I read your
written statement, I am trying to figure out, as far as the
initial getting involved with AIG and what you all did, I don't
know what anybody else would have done. I don't think we had a
choice, or that you had a choice. So let me say that I think we
did the right thing there.
Now, this is where it gets sticky. We also have a
situation, Secretary Geithner, where the American people are
concerned that a lot is being done for Wall Street, but not
enough being done for Main Street. You understand that?
Secretary Geithner. Absolutely.
Mr. Cummings. And one of the interesting things is that you
talked about how, if you had not taken the action from the
beginning, how it might have affected Main Street, the
constituents of all 435 Members. Can you tell us, if you hadn't
taken the action, how might it would affect students in my
district or businesses or whatever? Can you tell us that?
Because I don't think that is getting through.
Secretary Geithner. Thousands of more factories would have
closed their doors. Millions more Americans would have lost
their jobs. The value of America's houses and savings would
have fallen even further than they did at that time. People
would have rushed to take their money out of banks. It would
have brought about utter collapse. I don't know a better way to
say it than that.
And if people wonder whether that was true, I think all
they have to do is look back at what actually happened in the
fall of 2008, and you saw the value of American savings fall by
almost 40 percent; trillions of dollars in lost wealth.
Millions of Americans lost their homes; thousands and thousands
of businesses had to close.
That is what happens when you let a financial crisis get
out of control. Governments should never let that happen, but
if they don't act--and this is a very important thing for
people to understand. People think it is unfair for the
Government to act to rescue a financial system. But you cannot
help an economy recover, you can't create jobs, you can't
preserve the value of people's savings without a functioning
financial system.
Mr. Cummings. Another moment, when we requested the
hearing, that I was concerned about was this counterparties. As
you probably know, I, along with 26 other Members of Congress,
requested that SIGTARP, Barofsky, look into that whole issue,
and there have been comments that the capital levels of the
counterparties were tenuous, and had they not been paid in
full, they risked collapse. Was this a real possibility?
Secretary Geithner. In my judgment, that was not the most
important risk posed by AIG. AIG's failure would have posed
some direct losses on those major banks, but those losses
themselves were not the issue; they would not have been
significant. The threat to the system--and this was a threat to
all institutions operating--was the threat of collapse of the
system as a whole. And if AIG had failed, you would have seen a
crisis spread to insurance companies around the world and you
would have seen investors, depositors, creditors, pull back
from every financial institution in the world, and that would
have brought a much more precipitous collapse in all financial
values.
Mr. Cummings. My time is running out. Just real quick. When
the public has so much invested in a company, isn't it better
to err on the side of transparency, Mr. Secretary, as opposed
to keeping things secret?
Secretary Geithner. Of course. Of course.
Mr. Cummings. So what would push the decision to not be as
transparent? I mean, what would cause that?
Secretary Geithner. There are very few cases where it is
necessary for there to be either a lag in disclosure or some
gap. I am not sure how to--the best way to explain this, but
like in national security, like in law enforcement----
Mr. Kucinich. The gentleman's time has expired, but you can
conclude your answer.
Secretary Geithner [continuing]. Like in the protection of
confidential supervisory information, but also to protect the
taxpayer, there are some areas in which you need to be careful
about how you manage that. That is a discussion, though, you
should have with my colleagues at the Fed; they are in a better
position to answer it. But we would not want to disclose
information that would be bad for the taxpayer, make it harder
for the taxpayer to recoup our investments.
But, in general, Congressman, I completely agree that
transparency and disclosure are essential, the American people
deserve it and we have been very effective in bringing an
unprecedented level of security to all the basic actions we
took in this financial crisis, an unprecedented level of
transparency in disclosure.
Mr. Kucinich. Thank you.
Mr. Cummings. Thank you very much, Mr. Chairman.
Mr. Kucinich. Thank you.
The Chair recognizes Mr. Mica.
Mr. Mica. Thank you, Mr. Chairman.
Mr. Secretary, it is kind of interesting the way you have
framed your testimony and your involvement in some of these
decisions before the committee today. I think you have tried to
give the impression that you had to do what you had to do
because of the financial situation. That is pretty much what
you have said, right?
Secretary Geithner. Oh, absolutely.
Mr. Mica. Thank you. And then you used the term--you kept
using the term we made decisions together. Then you said a
dividing line of November 24th. Is that when you received word
that you were going to be nominated for Treasury Secretary?
Secretary Geithner. That is when the announcement was made.
Mr. Mica. Yes. So you have tried to distance yourself from
decisions that were made before that, but, in fact----
Secretary Geithner. No, no, I have not tried to distance--I
take pride and full responsibility for all those decisions.
Mr. Mica. OK. Then you also were aware when the New York
Federal Reserve Board ultimately selected, on November 3, 2008,
to purchase the underlying assets?
Secretary Geithner. Oh, absolutely.
Mr. Mica. You were.
Secretary Geithner. And, again, as I said, I take pride in
that decision.
Mr. Mica. Also, you had no knowledge of any cover-up,
right, or intent not to give full information and disclosure.
Secretary Geithner. Of course not.
Mr. Mica. Of course not. So you took credit for the
decision but not the cover-up.
Secretary Geithner. No, no----
Mr. Mica. Then you distance yourself from any cover-up
before November 24th. And then, of course, you were out of the
picture from November 24th forward, is that correct?
Secretary Geithner. Congressman, I am not trying to
distance myself from anything. I will take complete
responsibility for decisions I played a role in shaping or was
part of shaping, including all decisions up to the 24th on this
case. And I am happy to take responsibility for all decisions I
have made since then too.
Mr. Mica. Then you were aware of 100 cents on a dollar
bailout.
Secretary Geithner. Absolutely.
Mr. Mica. Absolutely. And the risk that was posed by that
offer. So you knew about that, but you weren't attempting to
cover up, that is your testimony today?
Secretary Geithner. Of course not.
Mr. Mica. OK. So I believe either you made a bad decision
there or in fact there was the attempt to cover up one of the
biggest bailouts, back-door bailouts, in history. Now, you have
tried to frame it as you did it because you did it in the
interest of the people and the failure of the system. I am
telling you I believe these are lame excuses. Either you were
in charge and did the wrong thing or you participated in the
wrong thing. To me, it appears like when you were being
confirmed, a lot of controversy surrounded your not paying your
taxes. You gave lame excuses then. I believe you're giving lame
excuses now.
My final question is why shouldn't we ask for your
resignation as Secretary of the Treasury? I didn't think you
should have been Secretary of the Treasury when it was
disclosed that you didn't pay your taxes, because that is the
highest financial responsibility position in the U.S.
Government. So why shouldn't you step down now?
Secretary Geithner. That is your right. That is your right
to that opinion. I have worked in public service all my life. I
have never been a politician. I have served my country as
carefully and ably as I can, and it is a great privilege for me
to work with this President to help repair the damage that was
here when we took office. And I will do so as long as he asks
me to do so to the best of my ability, with great pride in this
country and in him.
Mr. Mica. Again, I think you're punting the blame and I
think you're trying to position yourself as----
Secretary Geithner. Congressman, you don't know me very
well.
Mr. Mica [continuing]. And yet----
Secretary Geithner. You don't know me very well. I will
take----
Mr. Mica [continuing]. I believe that we are not getting
the whole story; we are getting a lame story in a monumental
back-door decision of bailout for which the American taxpayers
will stay on the hook for huge amounts of money. Even by
estimates of the Treasury Department, there will be billions of
dollars from this deal, which either you should have been
overseeing, and you said you had knowledge of and you failed to
take some steps to further protect the taxpayer interest. You
were either incompetent on the job or you were not doing your
job and knew what was taking place and tried to conceal it, and
I think that is grounds for your removal.
Secretary Geithner. Congressman, I was there. I know what I
was responsible for. I take full responsibility and, as I said,
great pride in those judgments.
Mr. Kucinich. The gentleman's time has expired, but the
Secretary may answer the question as he sees fit.
Mr. Mica. He takes great pride in those judgments.
Secretary Geithner. I do. I take great pride in those
judgments. And people have a right to disagree with them and
they have a right to go back and look at them with great care
and analysis. And I hope you will give the same care and
judgment to looking at those decisions in retrospect, with the
benefit of hindsight, that we gave in making those decisions at
that time.
Mr. Kucinich. I thank the gentleman.
It is my time to ask questions and I am yielding myself 5
minutes.
Mr. Geithner, the New York Fed agreed to Goldman Sachs'
demands for billions to settle its counterparty claims with
AIG, 100 cents on a dollar, but for more than a year before
that Goldman and AIG had been locked into a dispute over that
money and Goldman believed it would lose up to $2.5 billion if
AIG defaulted. Did you know at the time that Goldman Sachs had
concluded it would not receive 100 cents on the dollar from AIG
in the event of default?
Secretary Geithner. I did not know, and I don't know
whether that is true or not.
Mr. Kucinich. Goldman had said publicly that they didn't
need the Government's money, that it was fully hedged and would
not have been materially affected if AIG had defaulted. But
that turns out to be disingenuous. Committee investigators have
learned that Goldman's supplemental insurance policy would not
pay in the event that the U.S. Government bailed out AIG.
Goldman's protection would pay only in the event AIG defaulted.
Goldman had not anticipated the Government bailout and so
hadn't put that contingency into the terms of its contracts.
That failure put Goldman at real risk of losing the entire
amount of disputed money once the Government rescued AIG.
Did you have any knowledge at the time, did Lloyd Blankfein
or anyone at Goldman ever admit to you or anyone working under
you that Goldman Sachs was not fully hedged in the event the
Government took over AIG, and that Goldman was at risk of
losing at least $2.5 billion if the Government bailed out AIG
and imposed less than 100 cents on the dollar on
counterparties?
Secretary Geithner. Congressman, I am not aware--and I
don't see how I could have been aware--of the precise details
of the hedging strategies of all those firms to the event of a
default by AIG. But we made a very careful effort to try to
assess, working with the supervisors of all the institutions at
exposure to AIG about what their economic exposure would be----
Mr. Kucinich. Had you talked to Lloyd Blankfein, for
example, about this? Do you remember talking to him?
Secretary Geithner. In the Goldman Sachs case in
particular, because there were a lot of press reports that were
consequential in this case, I did ask them directly what their
exposure was and I asked them to show me what their internal
information system reports showed about that exposure.
Mr. Kucinich. The committee, if I may, is going to have a
series of questions to submit to you in writing----
Secretary Geithner. Happy to answer those questions.
Mr. Kucinich [continuing]. So that you will be given an
opportunity to have an extensive answer on this point.
Secretary Geithner. Happy to answer those questions.
Mr. Kucinich. Now, Mr. Secretary, once the Government
stepped in, there was only one way for Goldman Sachs to get any
piece of the $2.5 billion, and that was if the New York Fed
voluntarily agreed to give it to them. Now, if the New York Fed
had fought for taxpayers, Goldman would have lost money it
didn't have any hope of recovering. In spite of public
statements to the contrary, the New York Fed had a lot of
leverage, a lot of leverage, to negotiate a reduction, which
would have saved taxpayers billions. But, instead, the New York
Fed took Goldman Sachs' position in its dispute with AIG and
settled it fully with taxpayers' money.
Now, Mr. Geithner, under normal circumstances, Goldman
Sachs would have had to sue AIG in court to recover the
disputed $2.5 billion, and they would have settled for
something less than that. Isn't it true that the New York Fed
gave Goldman Sachs a better deal than it could have ever
expected from AIG or any market player at any other time?
Secretary Geithner. Congressman, if we had the ability,
like we have for normal companies seized, to put them through
bankruptcy, if we had the ability, like we have for banks, to
put them into an orderly wind-down process like quasi-
bankruptcy, we could have done many things. But under the laws
of the land, we did not have the ability, so we faced a very
simple choice: let AIG default or prevent it. And there was no
way--financial, legal, or otherwise--we could have imposed
haircuts, selectively default on any of those institutions,
without the risk of downgrade and default, and that is the only
reason----
Mr. Kucinich. I just want to say, Mr. Secretary, since when
does saving the system require the taxpayers to give a better
deal than the market would normally deliver? Yet, that is what
the New York Fed did. The Government gave Goldman Sachs more
than Goldman Sachs had any right to expect, while at the same
time giving no financial relief whatever to millions of
Americans facing a foreclosure crisis. And if that doesn't
illustrate what the New York Fed thought who it was working
for, I don't know what does.
Secretary Geithner. Congressman----
Mr. Kucinich. You may respond and then my time has expired.
Secretary Geithner. Congressman, that is not true, and it
is unfair to the public servants----
Mr. Kucinich. What is not true?
Secretary Geithner. What you just said.
Mr. Kucinich. What? What isn't true?
Secretary Geithner. It is not true that the actions we took
in AIG were for the benefit of anybody but the millions of
Americans who, at that point, were suffering from the worst
financial crisis since the Great Depression. The only way to
help reduce that damage, protect that damage, was to fix the
system and prevent the catastrophic failure that would have
made that crisis worse. That is the only motive that
underpinned these actions by the Government.
Mr. Kucinich. I thank the gentleman. My time has expired.
The Chair recognizes Mr. Duncan.
Mr. Duncan. Thank you, Mr. Chairman.
Mr. Secretary, you talked about looking at these events
with the benefit of hindsight. Two men who did were Peter
Boone, who is a researcher at the London School of Economics,
and Simon Johnson, a professor at MIT----
Mr. Kucinich. Could the gentleman be closer to the mic so
we can hear you? Thank you.
Mr. Duncan [continuing]. Simon Johnson, a professor at MIT
Sloan School of Management, and they wrote in the New Republic
magazine, in the September 23rd issue, ``The Fed may well have
mitigated our current crisis by sowing the seeds for the next
one,'' and they say, in fact, the Fed has exacerbated the
possibility of another similar or even larger crisis. In fact,
the way they put it, they say, ``As a result, unless real
reform happens soon, we face the prospect of another bubble
burst bailout cycle that will be even more dangerous than the
one we have just been through.''
Now, I assume you know that the American people are very,
very angry about these bailouts and the bonuses and salaries
that have come about through what most people see as a big
government-big business duopoly, and they feel like this big
government-big business duopoly has been manipulated in such a
way as to allow just mind-boggling salaries and bonuses, and
allowed very few elitists at the top to come out like robber
barons to an extent really not known in American history.
Because of big government, through the Federal Reserve system,
our free market system was not allowed to operate, and it seems
to most of us that it is not capitalism when Government uses
billions and billions of taxpayer money to prop up a very few
well-connected firms.
Now, that leads me to two questions. One, has the Treasury
informed any of these financial giants that we will not follow
too-big-to-fail policies in the future? And, second, do you
think we should limit these salaries, these ridiculously
excessive salaries and bonuses, that are even being talked
about even today in any of these firms that got taxpayer
bailout funds?
Secretary Geithner. Congressman, that was a very thoughtful
question. You asked exactly the right question. In a financial
crisis, you face this tragic choice: you can let it try to burn
itself out and let the damage spread to all sorts of innocent
victims, or you can act to prevent it, knowing that acting to
prevent it will create the risk that in the future investors
will expect the Government to step in in the future and save
firms from the consequences of failure. That is the dilemma at
the heart of strategy in financial crisis.
To stand back and let it burn is irresponsible. It is what
happened in the Great Depression. It almost happened to this
country. The moral, just, pragmatic, fair choice--and this
should be true if you are a Republican or a Democrat--is to act
to protect the innocent.
But, as you said wisely, by definition, that creates the
risk we sow the seeds for future crises, and that is why, in
the financial reform problem, we all have a huge stake in
trying to make sure we not just limit risk-taking in the
future, but that investors and equity holders and creditors and
managers and executives do not run these firms with the
expectations the Government will be there again. And that is
why it is so important we put in place types of bankruptcy
mechanisms that we have now for banks but we do not have for
institutions like AIG.
Now, absolutely, we have made clear in public, in crystal
clear terms, in reform proposals that are now moving through
the Congress, that we need to end this expectation of too-big-
to-fail and Government assistance. And if you look at what we
have done since we came to office, we have moved very
aggressively to pull the Government out of these institutions,
to make sure we are not in these institutions a day longer than
is necessary, to replace the public capital with private
capital; and we have done that by forcing disclosure and
forcing firms to recapitalize with private money, precisely
because we want to limit the scale of the Government's
involvement and end this exceptional period as quickly as we
could.
And that strategy has been very, very effective in ways
that people on the right and the left should welcome. On the
right, it means that the Government is out much more quickly
than anybody expected; on the left, people should know, with
confidence now, that we have far more resources now available
to help address the long-term challenges we face as a country
to reduce our long-term deficits and try to meet the things
that we have to do to fix what was broken in this country.
But you asked a very good question and I agree very much
with the thrust of your concern.
Mr. Duncan. Well, that was a good answer to my first
question, but my second question was do you think bonuses and
salaries should be limited in any way in these firms that did
receive Government bailout money?
Secretary Geithner. I think----
Mr. Kucinich. The gentleman's time has expired, but please
answer the question.
Secretary Geithner. I think what happened to compensation
across this country and in the financial system was terribly
catastrophic. It is judged--it came in the wave of a huge
increase in income inequality in the United States over
decades. In the financial system it was much worse and it was
much more consequential because it helped encourage a level of
risk-taking that again brought the system to the edge of
collapse.
So it is deeply important in the public interest of the
country that Congress legislate reforms that will change how
bankers are paid. Government can't do it alone, though.
Shareholders and their representatives on the boards of these
firms have to bring about much tougher limits on how firms are
paid. I think that is very important to do and I hope we will
have support from the Congress in making sure we have the basis
for doing that.
Mr. Kucinich. I thank the gentleman.
The Chair recognizes Mr. Lynch of Massachusetts.
Mr. Lynch. Thank you, Mr. Chairman.
Mr. Secretary, I am well aware of your family's commitment
to public service, so it makes it more difficult, in a sense,
to ask these questions, but I honestly feel that the conduct of
yourself and Mr. Paulson were not consistently on the side of
the American taxpayer, and I will explain why. I will give you
two examples.
We had the situation with Bear Stearns. The circumstances
are the same: the world is on the brink; we have a disaster; we
are worried about the whole system melting down. With your
support and Mr. Paulson, Mr. Bernanke, we forced Bear Stearns
shareholders from a position, I think it was a high of $172 a
share in January. We forced them down to $2 a share because the
American taxpayer money was in the bailout. And that was
something that was supported by the Fed, by Treasury because we
felt that because the taxpayer was bailing them out, that the
shareholders of Bear Stearns should not be held harmless.
Now, you have a different situation here, slightly
different. A number of weeks later, where we have AIG going
under. And these are credit default swaps, so the money going
into AIG is going right out to the counterparties. This is a
pass-through. And the folks on the other side are Goldman
Sachs, largely. That is the principal beneficiary of all this.
And we don't negotiate a nickel, not a cent off of what they
are getting. You are in the same position. You are supposed to
be negotiating on behalf of the American people.
Now, you are saying, oh, the regulations were different.
Let me tell you something. We were changing the rules and
regulations every single day. We were taking action, the Fed,
under 13.3 under extraordinary circumstances. You had every
opportunity, every opportunity to weigh in on behalf of the
American people and make these people take a new deal, make
them take a haircut. You scalped the folks on Bear Stearns; 2
cents on a dollar they got; 2 cents on a dollar. The folks at
Goldman Sachs got 100 cents on a dollar. And that is just
unacceptable. Totally unacceptable. You had the opportunity and
I just think it was a terrible decision on your part, and also
on Mr. Paulson's part; and he is up later and we will talk to
him.
Secretary Geithner. Congressman----
Mr. Lynch. How do you expect to--look--and the thing about
changing over to the Obama administration, you get the same
people who are relying on you, the American taxpayer when you
are in one job and the American taxpayer is relying on you in
the other job. I don't see a conflict. I really don't. You
could have done the right thing by those people, by the
American taxpayer, because their money was being put into this
deal.
Secretary Geithner. Congressman----
Mr. Lynch. And it just stinks to the high heaven what
happened here----
Secretary Geithner. Congressman----
Mr. Lynch --and I don't like the obfuscation. And to top it
all off, the disclosure was not there. The disclosure was not
there at the proper time to tell the American people and tell
this Congress what was going on, and that is just inexcusable
and it makes me doubt, it makes me doubt your commitment to the
American people, it makes me doubt Mr. Paulson's commitment to
the American people, and I think the commitment to Goldman
Sachs trumped the responsibility that our officials had to the
American people.
Secretary Geithner. Congressman, I respect your opinion. I
know you hold those opinions strongly, but I completely
disagree. The American taxpayer would not have been better off
if the Government had made it possible for equity holders in
Bear Stearns to get more money. The American taxpayer would not
have been better off if we had let AIG default. None of us did
anything out of any concern for----
Mr. Lynch. There is a difference between giving them 100
cents on a dollar and letting them default. This was a new
game. You were creating new facilities every week to help
folks.
Secretary Geithner. We were. We were because----
Mr. Lynch. We were letting people go to the discount window
that never had an opportunity to do that. We were changing the
rules day by day and we had the banks at a position where we
could have exercised a lot of leverage, and you chose not to do
it.
Secretary Geithner. I disagree.
Mr. Lynch. You chose not to do it.
Secretary Geithner. I disagree with you----
Mr. Lynch. And that doesn't mean we have to pay them 100
cents on the dollar or we let them fail. There are increments
here and we never used that leverage.
Secretary Geithner. Not in this case.
Mr. Lynch. In this case exactly.
Secretary Geithner. No, not in this case.
Mr. Lynch. Under 13.3 we could have taken different steps
than we took here.
Secretary Geithner. Thirteen three had nothing to do with
this in this particular case. What 13.3 was--and this is
important for people to understand--13.3 was authority given to
the Federal Reserve to protect the financial system from broad-
based runs. It gave us the authority only to lend against
collateral to make sure that firms that were solvent could
fund. We did that because of the catastrophic damage caused by
decades of previous financial crises. We used that authority
because we thought there was no other choice and we used that
authority appropriately.
Mr. Lynch. Look, let me just say----
Chairman Towns [presiding]. The gentleman's----
Mr. Lynch. Reclaiming my time.
When Hank Paulson pulled nine banks into a room and said
you're taking bailout money, that was extraordinary action, OK?
Chairman Towns. The gentleman's time has expired. I must
move on.
Mr. Lynch. He could have done the same thing negotiating a
better rate on behalf of the American taxpayer.
I yield back.
Secretary Geithner. If it would have been possible, we
would have done it. Why would I want to be sitting here before
you today having to defend actions that look like they could
have been avoided? There is nobody who was part of that
decision that would not have done that if it would have been
possible. I try to be as careful as I can in explaining the
reasons why it was not possible, but it comes down to this
basic tragic choice: If you are prepared to default, you can
impose haircuts; if you can't accept the consequences of
default, you do not have any leverage. It would have been
vastly more expensive to the American taxpayer. It would have
been much more damaging to people you and I care about, people
you and I wake up every day worrying about, if we had let that
firm fail. There was no choice between default and the
restructuring of those contracts, and they left the taxpayer
better off----
Mr. Lynch. There was no shared sacrifice, no shared
sacrifice for Goldman Sachs and the American people.
Chairman Towns. Would the gentleman from Massachusetts
yield? The gentleman's time has expired and I now call on Mr.
Turner from Ohio.
Mr. Turner. Thank you, Mr. Chairman.
Mr. Geithner, in answer to one of my colleagues, you
previously stated that you had never been a politician. I want
to assure you, from your answers today, that you are absolutely
a politician. And let me tell you one of the examples----
Secretary Geithner. Do you mean that as a compliment or
not? I can't tell.
Mr. Turner. Let me tell you one of the answers that
troubled me about the issue in your written testimony of the
team concluded AIG's failure would be catastrophic. You go on
to talk about the insurance arms of AIG. Now, this is not the
first hearing that this committee has had or other committees,
and you know that we are aware of the independence of the
insurance arms of AIG. We have Maurice Greenberg, a former
chairman and CEO of AIG, said, ``to the best of my knowledge,
the problems that came to a head this year did not originate in
AIG's insurance businesses, which remain fundamentally
strong.''
We had the head of the New York State Insurance Department,
Superintendent Eric Dinallo, came in and said this, ``before I
go further, I would like to make one critical point. It is
important for everyone, and especially policy holders in AIG
insurance companies, to understand that the insurance
companies, which are regulated by New York and other States,
are solvent and have the funds to pay any policy holders'
claims; they had independent reserves.''
You did not bail out the insurance companies of AIG,
correct? They didn't need it. You bailed out the parent, right?
Secretary Geithner. Yes. But if the parent had defaulted--
--
Mr. Turner. So when we go through your answer of if AIG had
failed, the catastrophic effect of all of the insurance
companies that were under AIG, they weren't bailed out by you.
Secretary Geithner. No, that's not true. But maybe this is
helpful to go back a little bit. When AIG came to us that
weekend--remember, the Fed is not their regulator; the Fed had
no responsibility or authority over how they ran their
business, that was the province of other regulators. It was
inconceivable to me that this was a problem we were going to
have to try to solve, and we got all the people we could,
including the New York State insurance commissioner and his
staff, other people to look at and explain to us----
Mr. Turner. Let's pause a second. Did you bail out the life
insurance arms of AIG?
Secretary Geithner. Those insurance companies----
Mr. Turner. Did you bail out the life insurance arms of
AIG?
Secretary Geithner. Well, again, I wouldn't use that term.
The actions we took helped prevent----
Mr. Turner. Did you bail out the health insurance arms of
AIG?
Secretary Geithner. Again, the actions we took to prevent
default of the firm protected those companies from the risk of
failure.
Mr. Turner. Mr. Geithner, the testimony we have received
previously, from those who were looking at those arms, was that
they were substantially sound, so the catastrophic effects that
you list certainly are something that we would all have been
concerned about, but nonetheless----
Secretary Geithner. I disagree completely. People can look
at this and they can come to different judgments, but the
people who were responsible for looking at those insurance
companies frankly had no idea of the risk--and you could not
separate those companies from the companies that had taken
terrible risk. The tragic thing in the structure of the company
was they were so closely linked they couldn't separate them.
Why would we have not, if it had been possible to separate
the place that was taking the firm down, to separate that
cleanly, separate them from this? We would have done that in a
second. And, in fact, much of what the management of the firm
is trying to do today, still, 15 months later, is designed to
achieve that objective. But they were tightly connected; they
could not have been separated. And the insurance supervisors
who were responsible for the individual firms did not know the
extent to which the financial basis of the insurance companies
was so connected to the holding company and the AIFP that had
taken all those risks.
Mr. Turner. Mr. Secretary, as you were going through the
bailouts and as we look to the counterparties and the funds
that were received, one of the biggest concerns that I have had
through all of this process is that I believe that when it all
becomes public--and it hasn't all become public yet because we
don't have everything from you--that this may turn out to be
the largest theft in history, that there were parties that were
participating, through mortgage-backed securities and through
other credit default swaps, into defrauding Mr. and Mrs.
American Citizen on Main Street who was receiving a loan on
their home that was negative in loan-to-value ratio and also
had a greater risk than was being reported as the mortgage-
backed securities and credit default swaps were passed up the
chain.
Do you have any information of AIG knowing that the loan-
to-value ratios were inflated and that the risks were being
understated? Because I truly believe that throughout this
system that brought down the systematic mortgage crisis system
process, that there was a significant amount of defrauding
going on and that people need to be held accountable, and I
don't think in your system, where you are bailing out, you are
taking into consideration those that were bad actors.
Secretary Geithner. I completely agree that this country
allowed, under the laws of the land, a terrible erosion in
underwriting standards, a terrible amount of predation and
abusive practices in mortgage lending and consumer finance. We
should never have let that happen. And I hope you will join
with us in trying to pass reforms to prevent that from
happening again.
Mr. Turner. But in your bailout----
Chairman Towns. The gentleman's time has expired. Hold it a
second.
Let me just say something to all the Members. You know,
right now we have like 30-some Members who still have not had
an opportunity to question, so we are going to have to stick to
the time. So I want you to respect that. I mean, I noticed a
couple of situations where you are going over, but I am saying
to you that when the red light comes on, that is it.
We are now moving to Mr. Quigley of Ohio. Illinois, I am
sorry. Mr. Quigley of Illinois. Is he here?
Ms. Kaptur of Ohio.
Ms. Kaptur. Thank you, Mr. Chairman.
Mr. Secretary, welcome. Can you provide for the record a
copy of the recusal agreement that you signed when you were at
the New York Fed?
Secretary Geithner. I did not sign a recusal agreement; I
withdrew from day-to-day management, operations, and policies
of the New York Fed, and my colleagues, both in Washington and
in New York, can attest to that.
Ms. Kaptur. So there was no formal agreement?
Secretary Geithner. No. As I said in my testimony, what I
did is I withdrew from--and this was very important to do.
Again, no precedent for this, a sitting president of the New
York Fed being nominated to be Secretary of the Treasury. And I
withdrew from, after carefully consulting with my colleagues,
from involvement in monetary policy decisions. I did not go to
the FOMC meeting in December, and I withdrew from all decisions
about the individual cases involving the financial system and
from day-to-day management; and that was the right thing to do
at that time.
Ms. Kaptur. Thank you. Thank you for clarifying that.
No. 2, a lot of people think that the president of the New
York Fed works for the U.S. Government, but, in fact, you work
for the private banks that elected you.
Secretary Geithner. No, that is not true.
Ms. Kaptur. Can you provide for the record the names of the
handful of bankers on the board of the New York Fed that
elected you in 2003?
Secretary Geithner. That is a matter of public record and
of course----
Ms. Kaptur. It was 2003?
Secretary Geithner. Of course we can do that.
Ms. Kaptur. Thank you very much.
Secretary Geithner. But, Congresswoman, can I just say what
you said was not true. I work in the public interest. Officials
of the Federal Reserve work for the public interest and they
work for the government.
Ms. Kaptur. But the people don't elect you. The heads of
the Feds around the country don't elect you; it is the
individuals who sit on the board of the New York Fed that elect
you. Is that correct?
Secretary Geithner. It is slightly more complicated than
that. What the Congress did in setting up the Fed is set up a
system where the presidents of the regional reserve banks are
elected by their board, but it requires the approval of the
chairman of the board of Governors in Washington for them to
serve. So it is a delicate balance of checks and balances and
Congress designed that system.
Ms. Kaptur. But it is largely private banks that elected
you, and I would like you to provide that for the record,
please.
Secretary Geithner. Oh, absolutely. It is a matter of
public record.
Ms. Kaptur. The Cleveland Fed is not equal to the New York
Fed, so I am very interested in your answer to the record.
No. 3, Goldman Sachs was the largest domestic recipient of
funds in this AIG counterparty arrangement. Let me ask you, now
as Treasury Secretary, your chief of staff is the gatekeeper
for access to you. Could you please provide his name?
Secretary Geithner. His name is Mark Patterson.
Ms. Kaptur. Thank you. And for whom did he work before you
selected him as your chief of staff?
Secretary Geithner. He worked for the President's
transition team.
Ms. Kaptur. No, before that. Which Wall Street firm did he
work for?
Secretary Geithner. And before that--again, this is a
matter of public record and you know the answer to this
question--he worked for Goldman Sachs.
Ms. Kaptur. Thank you very much.
Secretary Geithner. But----
Ms. Kaptur. You answered my question, Mr. Secretary.
Secretary Geithner. No, Congresswoman----
Ms. Kaptur. Now, let me say this. The AIG transaction----
Secretary Geithner. What you are doing is----
Ms. Kaptur. You have answered the question. You have
answered the question. Thank you. The AIG transaction was
disturbing to many observers. Why did our Government not
require the bank creditors to take the lead and bear some of
the costs in any plan to stabilize AIG? You, in effect,
nationalized the company and let the bank creditors off the
hook. Why did you, as president of the New York Fed, not work
out an arrangement to remove the London unit from the company
rather than allowing the unit to infect the entire company?
Secretary Geithner. If we had had the types of bankruptcy
procedures we have for banks, it is possible that ultimately we
could have done that. And if it would have been easy and
cheaper for the taxpayer for us to separate the riskiest parts
of the firm from the healthy, profitable insurance companies,
we would do that; and, in fact, that is the core of the
restructuring strategy the company is now undertaking. But that
choice was not available to us at the time. If it had been
possible, of course we would have done that. But because we did
not have the tools that we have under bankruptcy, we did not
have that choice.
Ms. Kaptur. Thank you, Mr. Secretary. Your phone logs from
the subpoenaed material this committee requested, which I would
like to insert in the record, show between September 14th----
Chairman Towns. Without objection, so ordered.
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Ms. Kaptur [continuing]. November 26th--thank you, Mr.
Chairman--the critical period when the bailout occurred, and
just after September 15th, when the three major rating agencies
downgraded AIG's credit rating, you made hundreds of calls, and
the most, over 225, to Secretary Paulson, who was then
Secretary of the Treasury. What firm did he work for prior to
his appointment as Secretary of Treasury?
Secretary Geithner. He worked for Goldman Sachs.
Ms. Kaptur. He worked for Goldman Sachs. Now, Goldman
Sachs, as I understand it, got the most in counterparty
payments of any domestic institution, is that true, $14
billion?
Secretary Geithner. I actually don't know if that is true,
but that is a matter of public record.
Ms. Kaptur. Societe Generale got the most from an
international firm, but Goldman Sachs was No. 1. Now, you made
about 100 calls to Fed Chair Ben Bernanke, but then the next
highest number of calls in that period, you made 103----
Chairman Towns. The gentlewoman's time has expired.
Ms. Kaptur --to a man named Dan Jester.
Chairman Towns. Will the lady summarize?
Ms. Kaptur. Mr. Chairman, may I just ask what firm did he
work for?
Secretary Geithner. As you know, he worked for Goldman
Sachs.
Ms. Kaptur. Thank you. And I will have additional questions
with regard to who you phoned and we will place that in the
record. Thank you.
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Chairman Towns. Thank you very much.
Secretary Geithner. Mr. Chairman, could I just say one
thing in response to this? I just want to say--it is very
important.
Congresswoman, you were suggesting that the people who were
involved in this were not acting in the public interest, and
you were suggesting that they were working for the private
interest, not the public interest, and that is not true. I
would never, and I believe none of those individuals would ever
be part of any decision like that. And I think these people
were people of enormous integrity and experience operating
under exceptional circumstances, with no precedent, doing the
best they could for what was in the public interest.
Ms. Kaptur. Well----
Secretary Geithner. And it is important to say for the
record----
Chairman Towns. I must move. I must move. I must move.
The gentleman from Georgia, Congressman Westmoreland.
Mr. Westmoreland. Thank you, Mr. Chairman.
Secretary Geithner, when did AIG--if you could just give us
a date--when did AIG call and say we need some money?
Secretary Geithner. Well, they came to Treasury and the Fed
formally, I think, on that Friday, which was----
Mr. Westmoreland. Friday the----
Secretary Geithner. I think it was the--well, the calendar
will show. It was the Friday in September, the 11th or the
12th, I think.
Mr. Westmoreland. OK. So it was a Friday in September? And
at the time there were advisors of AIG that were also advising
the New York Fed. Were you aware of any conflicts among these
advisors or were there any discussions about what kind of
conflict this might bring about?
Secretary Geithner. Well, when AIG came to us and started
to try to walk us through their financial condition, they had
advisors with them and they were also in discussion with other
advisors that were not with us in the room at that time.
Mr. Westmoreland. When did that dollar amount become--after
the discussions, at what point in time was a dollar amount
derived at?
Secretary Geithner. You mean the initial terms of the
initial loan?
Mr. Westmoreland. Yes, the initial----
Secretary Geithner. I think we reached that decision
probably just on the eve of the formal agreement.
Mr. Westmoreland. OK.
Secretary Geithner. I mean, again, we were trying to do----
Mr. Westmoreland. And what would that date have been, do
you remember that date?
Secretary Geithner. Well, it would have been--you know, the
16th was when we concluded this transaction, so it would have
been just before that.
Mr. Westmoreland. Let me ask. On the counterparties, when
was that meeting with the counterparties to discuss what the
payment might be to them, do you remember those dates?
Secretary Geithner. I do not believe there was a meeting
with counterparties. What I asked my colleagues to do, after
looking at a range of options, is to approach the
counterparties individually and try to negotiate concessions.
Mr. Westmoreland. So there was no actual meeting where all
the counterparties were in a room and----
Secretary Geithner. I don't think--I would have to check
the record. I would be happy to check the record and get back
to you, but I do not believe that my colleagues at the New York
Fed brought them in a room together.
Mr. Westmoreland. So when you say your colleagues, these
are people that actually worked for you, they were under your
direction?
Secretary Geithner. Absolutely. And they acted at my
direction.
Mr. Westmoreland. Yes, sir. So you were aware of the 100
percent payment to the counterparties.
Secretary Geithner. As I have said many times, we decided,
and I fully supported, the decision to----
Mr. Westmoreland. I understand. That is a yes, that you----
Secretary Geithner. That is a yes. I am sorry.
Mr. Westmoreland. OK. Now, in each one of these meetings
with the counterparties to negotiate, we weren't able to
negotiate any of them down?
Secretary Geithner. Yes. I mean, I think it is the hardest
thing----
Mr. Westmoreland. I mean, there were separate meetings, I
guess? I mean, did you question the negotiating skills of some
of these people that----
Secretary Geithner. No. These were--again, these were very
talented people with a lot of experience who knew how to do
this; many had done this for a living. But, again, unless you
can threaten default or threaten to pay below par--you
understand this--you don't have any leverage in the
transaction. And, in fact, if we had negotiated with the threat
of default like that, our concern was that would risk a
downgrade and would have brought about the collapse of----
Mr. Westmoreland. Do you know if AIG had approached any of
these people about any type of negotiations about what a sum
may have been? Because once the Government gets behind it, like
you said, it takes way your negotiating skill.
Secretary Geithner. You are exactly right. You are exactly
right. And I am not sure, but I think, if I am not mistaken,
AIG had probably tried to do that before, before the Government
came in, but I can't speak to that today.
Mr. Westmoreland. But these people with these credit
default swaps, they were all bright people, they knew the high
risk of what they were getting involved with, did they not?
Secretary Geithner. Well, you know, the tragic lesson of
this crisis is lots of bright people with lots of experience
who should have known better made bets on the future of the
country that assumed house prices would never fall, and the
judgments AIG made were very similar to the mistakes the rating
agencies made.
Mr. Westmoreland. But these people were making a lot of
money off of this. I mean, this was a high risk, high reward
business, right?
Secretary Geithner. Oh, you mean the people at AIG? Oh,
yes, absolutely.
Mr. Westmoreland. It is obvious that the AIG deal is a bad
deal for the taxpayers. Is this deal being renegotiated and is
anybody at the Treasury working with AIG to try to renegotiate
this deal?
Secretary Geithner. Congressman, it is a better deal for
the taxpayer than the alternatives, and is proving, in many
ways, far better than many of us thought, although, as I said,
the U.S. Government is still exposed to substantial risk of
loss. But we have a new board in place----
Mr. Westmoreland. Just answer, because I have one more
question.
Chairman Towns. No, the gentleman's time has expired and,
of course, the gentleman from Maryland is recognized for 5
minutes.
Mr. Van Hollen. Thank you, Mr. Chairman.
Thank you, Mr. Secretary, for your testimony.
As you indicated, the previous administration came to
Congress and to the country and said we faced an extraordinary
circumstance, that failure to act to help rescue the financial
industry would hurt people on Main Street, innocent bystanders
in this process, and you took the action that you did and you
have properly said that we need to learn the lessons from what
happened, and the administration and the Congress are working
to do just that.
Here in the House, we already passed a Wall Street
accountability bill to try to do two things: No. 1, provide the
Fed and others with tools to make sure we don't have a
situation where a firm becomes too big to fail in a manner that
it hurts innocent people; second, to make sure that there is a
failsafe, if somehow that happens, there is a pool of money
raised from the banks, not from the taxpayers, to pay for the
rescue; and, No. 3--and the President has proposed this--a fee
on the biggest financial institutions, $50 billion plus in
assets to recover every penny of TARP money. And I think it is
important to understand, that everyone understands that
includes every penny extended to AIG and every penny extended
to the counterparties.
Now, in the House we passed a bill and we had an amendment
to that bill offered by Congressman Gary Peters of Michigan. I
have it right here. And it says that fee will remain on the
biggest banks not just to capitalize a fund to be used in the
event of future problems that they have to pay for their own,
but it says you keep that fee on until you recover every penny.
And I must say I was surprised--I wish all our colleagues on
the other side of the aisle were here--I was surprised that
this very simple idea was rejected unanimously by the other
side in a vote we had on this. And that vote would have
ensured--it passed, but that was a vote to make sure that we
get back every penny that the taxpayer gave to AIG, every penny
that the taxpayer gave to the counterparties.
So if you could just speak to the importance of making
sure, No. 1, we take measures to prevent this from happening in
the future, but, just as importantly, making sure we let
everybody on Main Street know that their money that they helped
send to rescue the package will be recovered if we adopt the
proposal in the House and the President's proposal.
Secretary Geithner. If Congress joins the President in
adopting this proposed financial fee, then the American
taxpayer will not be exposed to a penny of loss for everything
the Government had to do to fix this mess in AIG or everywhere
else. That is not enough, though. We believe it is very
important to make sure we work with Congress to put in place
constraints that will prevent this from happening again. It was
a tragic failure of the country not to act sooner to limit
risk-taking by some of the largest institutions in the world
that were operating with not enough capital and no oversight,
and we have to make it clear in the future that we are going to
be able to let firms fail without costing the taxpayers money
and without costing collateral damage.
Now, Mr. Van Hollen, I just want to say one thing. The cost
to the American people cannot be captured in the simple
financial costs of the TARP. We will protect them from those
costs if Congress passes this fee, but the costs of the crisis
are much more damaging. It caused much more damage. It can
never be captured by the accounting costs of the losses under
TARP. But we have a great responsibility and obligation to
reform the system so that they are not in that position again,
and the least we can do to make sure that taxpayers aren't
bearing the direct costs that we took in AIG, forced to take in
AIG and elsewhere.
Mr. Van Hollen. Obviously, the cost of some of these bad
decisions obviously went beyond [remarks off microphone] that
if we adopt the amendment the House has taken as a matter of
final law, or the President's proposal, which is very similar,
the moneys that have been the subject of the conversation today
that the taxpayers attended to AIG and that went to the
counterparties, will be fully recouped and returned to the Fed
Treasury on behalf of the taxpayers.
Secretary Geithner. That is exactly right. It is better
than that, though, Congressman, because the specific
transaction that is the subject of so much attention,
appropriately, in this hearing, themselves are likely to earn
the taxpayer a modest profit. The Government is still exposed
to some risk of loss on the rest of its investments, but if we
adopt this fee the taxpayers will not bear a penny of that
cost.
Mr. Van Hollen. Thank you, Mr. Secretary.
Mr. Welch [presiding]. The Chair recognizes Mr. McHenry.
Mr. McHenry. Just to be clear, there is $68 billion worth
of loss, $30.4 billion associated with this AIG deal we are
talking about now, so there is significant loss to the
taxpayers already through TARP. So this new tax is simply about
making up for that revenue.
Mr. Secretary, do you support H.R. 4173, the Wall Street
Reform and Consumer Protection Act?
Secretary Geithner. Congressman, I am not sure of the
precise legislative amendment you are citing. Can you describe
the bill?
Mr. McHenry. No, it is not an amendment, it is a bill
sponsored by Barney Frank of Massachusetts.
Secretary Geithner. Is this the comprehensive financial
reform law that passed the House in December?
Mr. McHenry. Yes.
Secretary Geithner. Yes, I support that.
Mr. McHenry. You support that. And do you support the
Volcker rule?
Secretary Geithner. Absolutely. What the President proposed
is that working with the bill that passed the House, which
included a provision that I think Mr. Kanjorski authored, to
give the Government the ability to limit risk-taking by banks,
that we make sure those translate into limits that will
actually prevent risk-taking in the future.
Mr. McHenry. So it is consistent with H.R. 4173?
Secretary Geithner. Absolutely. That bill--and this is very
important for people to understand. That bill included a
provision----
Mr. McHenry. I understand; I am on the committee.
Secretary Geithner. Yes--included a provision that would
give the Government the ability to limit risk-taking in a way
to help prevent future crises.
Mr. McHenry. Wasn't it your legislative staff that really
worked to change the Kanjorski amendment?
Secretary Geithner. Well, again, we worked closely with
members of that committee on a whole range of those provisions
to make sure that they met the intent----
Mr. McHenry. No, you are not answering my question.
Secretary Geithner. Oh, on that amendment? Absolutely we
worked with them on that amendment.
Mr. McHenry. You worked with them on that amendment----
Secretary Geithner. But on alternate----
Mr. McHenry [continuing]. To limit it in terms of its
reach?
Secretary Geithner. No. We worked on it to limit it to make
sure that it was going to work.
Mr. McHenry. OK, let's not--OK. So, in essence, the Volcker
rule is something you support?
Secretary Geithner. Yes.
Mr. McHenry. OK. You testified last month before the Joint
Economic Committee, ``I would not support reinstating Glass-
Steagall, and I don't actually believe that the end of Glass-
Steagall played a significant role in the cause of this
crisis.'' Do you still stand by that statement?
Secretary Geithner. Absolutely.
Mr. McHenry. How do you reconcile that belief with this
rule that, in essence, limits or forces banks to divest in
hedge funds and private equity and all these other additional
elements that is in essence Glass-Steagall?
Secretary Geithner. Well, what Glass-Steagall did was to
allow banks to underwrite equities and to engage in a whole
range of other types of financial activities, insurance as
well----
Mr. McHenry. It limited that ability, to be clear.
Secretary Geithner. And we support, as I think the bill
that you cited did support, it did actually provide authority
to limit a set of activities so that the access to the safety
net is not subsidizing excessive risk-taking. It is a simple
principle. Does it dial back some of the Graham-Leach power
reforms? It does do that.
Mr. McHenry. OK. So----
Secretary Geithner. But it is not what people typically
referred to as Glass-Steagall.
Mr. McHenry. OK, so it also says that if you engage in a
certain type of--if you have a certain form, meaning a bank
holding company, you have to adhere to certain rules, correct?
Secretary Geithner. That is right.
Mr. McHenry. OK. You also testified before the Financial
Services Committee, of which I sit, last year that ``Financial
products and institutions should be regulated by the economic
function they provide and the risks they present, not the legal
form they take.''
Secretary Geithner. That is right, I agree with that.
Mr. McHenry. And so you support a rule that says, based on
a legal form you take, you have to adhere to these principles.
How do you reconcile this?
Secretary Geithner. They are perfectly consistent, but let
me state the basic principle again.
Mr. McHenry. They are perfectly opposites.
Secretary Geithner. No. What we are saying is--and this is
very important for people to understand. If you are operating
in the financial markets, you are helping companies raise
credit, raise capital, you are helping make markets work, you
are providing liquidity to markets, it doesn't matter, it
shouldn't matter to us or the American people whether you are
called Goldman Sachs or whether you are called JP Morgan. You
should be subjected to a set of constraints on capital, on
leverage and how you are funded that limit the amount of risks
you take.
If, in addition to that, you want to own a bank and operate
a bank, then there are a set of other limits that we think are
good in the public interest so that, again, you can't take
advantage of that access to the safety net to subsidize a set
of activities that are not essential to----
Mr. McHenry. But basically you are saying, if you just
simply drop the bank holding company label, you are out from
under this regulation.
Secretary Geithner. Absolutely not. And that would be a
mistake for the country. Our view is----
Mr. McHenry. That is actually what the one-page rule----
Secretary Geithner. No, it does not do that. That is not a
fair reading of the rule. But, Congressman, maybe this would be
helpful for me to say to you. We will work very closely with
Members on both sides of the aisle to make sure that this
legislation results in a set of sensible constraints in risk-
taking----
Mr. McHenry. That would be something new----
Mr. Welch. The gentleman's time has expired.
Mr. McHenry [continuing]. Over the last 13 months, because
you have not reached out to Republicans, to be clear, on the
Financial Services Committee.
Secretary Geithner. That is not true, but, again, I am
happy, going forward, to make sure that, as we try to give
these force of law, reflect them in regulation, we do so
carefully, with full consultation.
Mr. Welch. The gentleman's time has expired and the
chairman recognizes himself for 5 minutes.
Thank you, Mr. Geithner, for being here. No. 1, I just want
to remind my colleagues on both sides that the whole request
for the bailout that had to be administered by the Treasury
Department was at the request of then President Bush. And,
second, I understand your testimony that the people responsible
for administering this made the best decisions they could under
the circumstances.
I just want to ask a couple of questions, though, that
start with one of the statements you made, Mr. Geithner, about
the effect of the actions taken has stabilized the financial
system. I am not here to argue that. The question I have is has
it helped the broad Main Street economy. And there are many who
believe, and I am among them, that Wall Street got out ahead of
itself, got in the business of self-enrichment rather than
financing American jobs, American entrepreneurs, and actually
transformed itself from an entity that was about creating jobs
into the greatest job killing machine in the history of the
country.
There are two things that I want to ask. One is the bank
fee that President Obama has endorsed, you see that as
essential to have the folks who were largely responsible for
the financial meltdown pay the cost so that it is not the
taxpayers, is that correct?
Secretary Geithner. Absolutely. In the reforms we proposed
to the Congress back in June, at the center of that proposal
was a basic principle which, in the future, governments exposed
to risk of loss, the banks pay. In the TARP legislation you
referred to, there is an explicit provision there that puts an
obligation on me to propose ways to recoup the costs, and we
propose that in the President's financial responsibility bill.
Mr. Welch. All right, thank you. And I support that; I am
glad you are doing it.
Second, there are a number of us, well over 60, that are
supporting a tax on Wall Street bonuses, and I just want to get
your opinion on this; and I will give an example of the kind of
conduct that was allowed to occur. It has been reported, as you
know, in the New York Times that Goldman Sachs had a department
that bundled subprime mortgages. It then had folks who
advocated to the rating agencies to give it the highest rating
possible. It then went to its trusted clients and sold those,
and then it went to its trading desk and sold them short.
Is that the type of conduct that you think should be
monitored and curbed by any financial regulatory monitor?
Secretary Geithner. Congressman, I believe deeply that we
need tougher rules, enforced more effectively and evenly to
make sure that consumers and investors are not taken advantage
of, and the system is not so fragile the Government has to step
in in the future and take this enormous risk of loss. I deeply
believe that.
Mr. Welch. Let me get to--let me just ask you about the
bonus tax, because I would be interested in this. Firms like
Goldman received TARP funds. They received low interest money
from the open window of the Federal Reserve and, of course,
Goldman and other firms received direct pass-through payments
when AIG was bailed out, correct?
And when Mr. Paulson, your predecessor, was on the phone
requesting this money--this was not anything that you made the
request for--he assured us that Wall Street had learned its
ways. Goldman and the other Wall Street firms are back to their
old ways; they have been so successful--and let's give them
credit, they are good at what they do. The question is whether
what they do is good for the economy and for Main Street. They
have been able to set aside $140 billion to $160 billion for
bonuses. And they could have lent that out, they could have
added to their capital base, and the third choice was they
could put it in their pockets, which is the one they have
chosen.
Do you think, in view of the fact that much of their profit
was made through taxpayer generosity, it would be appropriate
to tax bonuses, as I suggest in my legislation, at 50 percent
above $50,000?
Secretary Geithner. Congressman, of course I would be happy
to take a careful look at that legislation and talk to you
about how best to deal with that. The basic principle that we
support fully is to make sure that the American taxpayer is not
exposed to a penny of losses from the actions the Government
had to take under the TARP authority; and I completely agree,
as I said earlier, that we need to work with the Congress to
make sure we bring about fundamental changes in how bankers are
paid so that they are not taking risks that could imperil the
economy as a whole. Doing that is hard to do right. We have
tried in the past, not very successfully. It is an obligation
that the shareholders have and boards have too, but it is the
Government's responsibility in the end to make sure----
Mr. Welch. My time is almost up. We would take the money
that was raised from that and put it into small business
lending, and, as you know, the big banks that received TARP
funds have reduced lending to American enterprise. Folks in
Vermont who run businesses ask me, if those guys make so much
money, how come they can't lend me any?
Secretary Geithner. I agree. And I think if you saw the
paper today, we are close to proposing to the Congress that we
take a large amount of the resources that we have gotten back
from banks, from the large banks, and devote them to exactly
that objective, trying to make sure that small banks and small
businesses have access to credit.
Mr. Welch. Thank you, Mr. Secretary. My time is up.
The Chair now recognizes the gentleman from Ohio, Mr.
Jordan.
Mr. Jordan. Thank you, Mr. Chairman.
Thank you, Mr. Secretary, for being with us today. Now, Mr.
Secretary, you were involved--you have said this many times--
involved with the decision 15, 18 months ago relative to the
initial TARP bailout. You were involved in all that; you
thought it was the right decision to make at the time, coming
to Congress, asking for the $700 billion?
Secretary Geithner. Oh, I thought it was absolutely
essential at that point. The country had no choice.
Mr. Jordan. And this committee has had several hearings on
the Bank of America and Merrill Lynch, and you were involved in
that decision. We have emails that talked about you were in the
loop, you knew what was going on there; you were supportive of
what took place with the merger of--with the acquisition of
Merrill by Bank of America. Yes or no?
Secretary Geithner. Well, that is right that, at that time,
I was part of an effort to try to find the solution, private
solution to Merrill Lynch at that point, and I thought that
action at the time was necessary and appropriate, yes.
Mr. Jordan. And today you have said that you think the
initial decision relative to AIG and the payment to the
counterparties, you think that was appropriate. You stated that
strongly in your written testimony. You talk about this is in
the best interest of the American people.
Secretary Geithner. I do. I do.
Mr. Jordan. We did not act to help form banks, we acted
because the consequences of failing at that time, in those
circumstances, would have been catastrophic to our economy,
American families, and American businesses. You think it was
definitely the right decision?
Secretary Geithner. I do.
Mr. Jordan. And the staff that worked for you at the New
York Fed would be in agreement with that analysis, that this
was so critical, this had to get done, the sky was going to
fall, the world was going to end if we did not do what you
decided to do relative to the counterparties and the $62
billion that was spent, is that correct?
Secretary Geithner. I believe it is. But I think it would
be fair to say there were those among us involved in this in
each of the industries involved--Washington, New York
Treasury--who were deeply troubled by that choice, were not
comfortable with this----
Mr. Jordan. Were not comfortable with it, but you thought
it was what you had to do at the time.
Secretary Geithner. I believe that, yes.
Mr. Jordan. And it was so important, as you have said in
your written and your testimony here this morning, your oral
testimony, that, you know, this was critical to American
families, American businesses.
Secretary Geithner. I believe that.
Mr. Jordan. So it begs the obvious question: Why the
secrecy relative to disclosure? If it is that important, $62
billion, why in the heck not disclose it when it is happening,
since you have subsequently done that? Why the secrecy? And,
frankly, why weren't you--if it is that critical, if it is that
important, why in the heck did you recuse yourself? Why weren't
you involved?
Secretary Geithner. Well, again, just to step back a
second, when the Fed disclosed this in March 2009, I thought it
was the right thing to do, and I think reasonable people,
looking back at this, could say why wasn't that possible
sooner. I think that is a reasonable question----
Mr. Jordan. Why wasn't it possible in November when it was
all going down?
Secretary Geithner. Right. But all I can say is what I
understand and was involved in, and I was not involved in
discussions about decisions about what to do with that
particular transaction, the counterparties, or the details. And
that is because of decisions----
Mr. Jordan. Let me ask you this. Do you believe the
decision that was made by the folks who worked for you at the
New York Fed to not disclose until March and not disclose when
it was all taking place, do you support that decision?
Secretary Geithner. Congressman, I, as I said----
Mr. Jordan. It is a yes or no. I mean, you have said you
are transparency; you said this was so critical, the world was
going to end, everything was going to go to----
Secretary Geithner. Let me tell you something I----
Mr. Jordan. Why not?
Secretary Geithner. Let me tell you something I deeply
believe, OK? It is very hard to put yourself in shoes you did
not occupy and have really a fair sense to evaluate those
actions in that case. And I don't feel like I can put myself in
their shoes at that time.
Mr. Jordan. Let me tell you what I think happened.
Secretary Geithner. But I do believe that they acted with
great integrity, care, and judgment after----
Mr. Jordan. Here is what happened. Here is what happened.
Mr. Lynch was on the right trail over here. I mean, this is a
pattern, we have seen it. You came to the Congress of the
United States, you said give us $700 billion of taxpayer money.
Secretary Geithner. I did not do that.
Mr. Jordan. I am saying the Government. The Government came
to the Congress, give us----
Secretary Geithner. Your Government, your President at that
time.
Mr. Jordan. I understand. I didn't say Democrat or
Republican. I understand the Government. Give us the money, we
are going to go buy the troubled assets. They didn't do that.
Nine days later, 10 days later, as Mr. Lynch pointed out, you
were in the room when they told the nine biggest banks we are
not going to buy the troubled assets, you are going to take the
TARP money.
Secretary Geithner. I was, and that was one of the best
decisions, one of the most important decisions that----
Mr. Jordan. But understand the pattern. The Congress of the
United States was told one thing; 10 days later an entirely
different action was taking place.
Secretary Geithner. I don't think that is actually correct.
What the Congress authorized was the billions----
Mr. Jordan. You don't think the Congress passed that bill
because they understood that the money that the taxpayers were
going to put up was going to be used to buy troubled assets?
Secretary Geithner. Well, as I said, I can't put myself in
your shoes, but I think the salient point is that the authority
that President Bush asked for gave my predecessor the authority
to put capital in banks, and doing that----
Mr. Jordan. Here is the pattern, Mr. Geithner. Mr.
Secretary, here is the pattern. The Government comes to the
taxpayer, says we need more of your money, we need a boatload
of your money, the world is going to end; we want it for a
specific purpose; then they do it for something else. Then they
come to the taxpayers and say we need more of your money and we
are going to use $62 billion and they don't disclose to the
taxpayer what is going on. This is why we never should have
traveled down this road, this unprecedented involvement by the
Government in the private sector. We have seen it----
Mr. Welch. The gentleman's time has expired.
Mr. Jordan. We have seen it with Bank of America and
Merrill Lynch, we have seen it now with AIG.
I thank the chairman.
Mr. Welch. The gentleman's time has expired. Thank you.
The Chair recognizes Mr. Clay.
Mr. Clay. Thank you so much, Mr. Chairman. I want to thank
Chairman Towns and Mr. Issa for conducting this hearing.
Secretary Geithner, several economists and policymakers
assert that AIG's ability to provide cash collateral to their
counterparties was not relevant in designing their assistance
package. What is your opinion on this claim that it was not
relevant in designing the assistance?
Secretary Geithner. I agree with that. What was relevant
and necessary was how to restructure this firm in ways to
protect the taxpayer, to the extent we could, from the risk of
greater losses, and our choice was at this point this very
stark, tragic choice, which is to let AIG default or not. And
we thought that default itself would have been much more
expensive.
Mr. Clay. OK, help me and help the American people
understand. Why was AIG's ability to make payments to its
counterparties for their toxic assets even a factor in
determining the amount of bailout money to award them?
Secretary Geithner. For an insurance company or any
financial institution to operate, they need to be able to
operate with a high credit rating. Without that, they could not
borrow money to function. They could not write insurance
contracts because people would not believe they would have the
financial wherewithal to back those commitments.
So the rating is critical. If we were to have defaulted on
any of those legal contracts, AIG would have been downgraded.
The counterparties would have the right to take more money and
to default on and to bring about the basic collapse of the
firm. So it is that stark, tragic choice. If AIG had not paid,
they would have lost the rating and the firm would have
collapsed. If we had continued to lend them money for them to
make those payments, the rating would have also been in
jeopardy, because AIG already had a lot of debt at that point.
So the choice was, again, to restructure them so that we
limited the drain of cash and left the taxpayer with any
potential positive return on those underlying securities.
Mr. Clay. So you are saying that the counterparties would
have had a right, through bankruptcy----
Secretary Geithner. A legal right to sue to recoup that
claim.
Mr. Clay. OK. Did anyone involved in the concession
negotiations ever suggest that AIG's counterparties should not
be relevant in their bailout package? Did that issue ever arise
among the negotiations or anyone that you encountered during
the negotiations?
Secretary Geithner. That is a complicated question, good
question, but as I tried to explain in the testimony, what we
were guided by, what was going to be the best way at least cost
to prevent default and protect the system, and the entire
system was at stake then, and no firm in the country would have
been insulated fully from the collapse of the entire American
financial system, and our judgment was that AIG's default would
have materially raised the probability of that broader
collapse. So, again, our choices were terrible choices, but
they came down to what was the best way to prevent that outcome
on the best terms for the taxpayer.
Mr. Clay. OK, so then that gets to the point of being too
big to fail. AIG's tentacles were that widespread throughout
the country and the world that----
Secretary Geithner. It is exactly the right question. There
are two things that mattered in this case. One is you had a set
of firms like AIG, huge, risky, spread everywhere, involved in
a whole range of things, and you had a world that was burning.
So, again, the first time since the Great Depression, you had
financial systems around the world really at the brink of
stopping in their tracks.
And it is those two conditions that are most risky. If the
world had been stable, everything had been fine, we weren't on
the edge of the worst recession in generations, then we could
have afforded to be completely indifferent to the fate of AIG
or all those institutions. But because AIG was so large and so
interconnected, and because the system was so fragile, it would
have been irresponsible to take the risk, the failure would
have dramatically amplified the pressures that we are still
living with today.
Mr. Clay. Could you help describe what the reaction was in
negotiations to the counterparties, pros and cons, as far as,
you know, paying counterparties?
Secretary Geithner. Again, we wrestled with lots of
choices, as I tried to explain in my written testimony. We
thought about whether it was better to default, to impose a
haircut, to negotiate concessions under the threat of default.
We thought about keep paying and watching that money keep
running out the door, with the counterparties still holding the
underlying assets.
We thought about negotiating over time, trying to stretch
it out, see if we could find a better way to solve that
problem. None of those options were realistic; none of them
were feasible. They were not better than the choice we chose.
And, again, I think if you look back and you take a fair
reading of this, although the Government is still exposed to
substantial risk of loss, those losses are much lower today
because of the actions we took in AIG, and this transaction,
which, again, people are so understandably concerned about, has
put the taxpayer in a better position than if simply we kept
making those payments or if we defaulted on them.
Mr. Clay. Thank you, Mr. Secretary, for your responses.
Chairman Towns. The gentleman's time has expired.
I now yield 5 minutes to the gentleman from California,
Congressman Bilbray.
Mr. Bilbray. Thank you.
Mr. Secretary, we are supposed to do oversight and reform,
so we are trying to get the information so that we can do the
reform to make sure the next time this process comes up we have
procedures and laws that address this. So it is real important
that we identify how this went so we can try to correct it and
make sure it doesn't happen again. Not only in March you knew
that there was a so-called disclosure issue, but in February
you had said, in a speech, that one of the major issues that
you were concerned about is the lack of disclosure that was
causing the American people not to trust the system.
Now, I think we all agree that in layman's terms, with the
average citizen, when they heard disclosure issue, they hear
cover-up. Now, why, in a system that is supposed to be open--
the American people have a right to know where their money
goes. Why was there even a disclosure issue? Why were we even
discussing the so-called cover-up of the $160 billion, where it
was going, in this process?
Why was that even an issue that as soon as you knew that
there was a problem there, that somebody didn't clarify this?
Was that your staff had basically did not inform you that there
had been this cover-up, this disclosure issue, and did you make
that decision or was that decision made outside? Because AIG
sent the information over; it was an internal process within
the Government itself that said we are not going to disclose to
the public this information.
Secretary Geithner. My colleagues at the New York Fed I
think have put in the public domain a very thoughtful
explanation of the judgments they wrestled with and ultimately
reached, and I know, and I am confident, that their colleagues
in Washington spent a huge amount of time throughout those
months trying to wrestle with how to meet the understandable
public interest in greater disclosure of these things, and they
ultimately, I think appropriately, came to the decision that
they could and should put that information in the public
domain.
Now, you are exactly right, I have been a great proponent
of greater transparency, and the centerpiece of the strategy
that we adopted to fix this mess in the financial system was to
force the largest banks in the country to disclose for the
first time to the public, to all investors, the scale of losses
they might face in the event this recession was much more
damaging than it proved to be, and that provided the basis for
private investors judging who was strong, who was less strong,
and deciding to put capital into those institutions.
Mr. Bilbray. In other words, did your staff know the cover-
up was there, a disclosure issue was there before you knew it
was there? Was the decision to----
Secretary Geithner. Again, I don't--I think, again, as the
record the committee has already put in shows, there were
discussions that were happening about what to disclose when
throughout that period of time, but----
Mr. Bilbray. Were you involved in those discussions?
Secretary Geithner. As I said in my thing, I will say it
again, I played no role in decisions about what to disclose
about these transactions to these individual counterparties.
Mr. Bilbray. Did your staff make the decision not to inform
you or include you in that decisionmaking process?
Secretary Geithner. Yes, they did, although I made the
decision----
Mr. Bilbray. Would you want to know about that or would you
prefer that you didn't know about it at the time?
Secretary Geithner. I think, in retrospect, I wish I had
known, frankly. But after November 24th I appropriately removed
myself from decisions about a whole range of policy issues the
Fed was dealing with. But the people that were making those
decisions, in close consultation with people in Washington and
with legal counsel, are people of great judgment, enormous
integrity, and I have enormous trust and confidence not just in
their judgment, but in the quality of the decisions they made
throughout that period of time.
Mr. Bilbray. Do you feel today that at the time that they
made the decision to do the cover-up, the disclosure issue,
that they felt you did not want to know about it at the time?
Do you think they made a decision that----
Secretary Geithner. I do not--in my entire time there, I
was never aware of a situation in which my colleagues sought to
shield me from something consequential. I was president of the
New York Fed; I was going to be accountable for decisions made
on my watch. But after the 24th, for reasons that I think are
fair and right for the institution, I could no longer run those
day-to-day judgments, and I withdrew from those and I think
those were necessary. Now----
Mr. Bilbray. And your staff decided to shield you from the
cover-up side of it too?
Secretary Geithner. No, no. I decided that I would withdraw
myself from--I didn't decide this alone, I decided this in
consultation with the chairman of the board of Governors of the
Federal Reserve System and with the incoming administration to
protect the institution from the unique condition I was in
then.
Mr. Bilbray. Mr. Secretary, what date did you know that
there was a cover-up, a disclosure issue? When were you
informed?
Secretary Geithner. I only knew about these discussions
about disclosure when they started to be in the public domain.
I actually don't know when they first rose to the attention of
the Congress, but when they rose to the attention of the
Congress and they were in the press, then I was aware of it.
Chairman Towns. The gentleman's time has expired.
Mr. Bilbray. Thank you very much.
Chairman Towns. Let me thank you, Secretary Geithner, for
your testimony and, of course, we will now----
Mr. Issa. Mr. Chairman, I would ask unanimous consent that
all Members be allowed to put their questions in writing to the
Secretary and would ask that the Secretary, if he would respond
to them in writing, since so many Members have not been able to
ask their questions.
Chairman Towns. Without objection, so ordered.
Thank you, Mr. Chairman.
Mr. Chaffetz. Mr. Chairman, I am not sure what the right
point of order here is, but I recognize how tremendously busy
the Secretary is, but I also recognize the need for this
Congress and people on both sides of the aisle to be able to
ask some questions. We have been waiting patiently here all
day. I would hope that the chairman would----
Chairman Towns. Let me just say what the problem is. I am
one--as you know, you have been here long enough now to really
know me--who believes in openness and I believe in going as
long as it takes. But Mr. Paulson has a problem with his
schedule in terms of the amount of time that he would be
allowed.
If we continue, then he will not be able to testify. That
is the issue that we have to deal with. So, that is the reason
why we are cutting it, and it was agreed that this would
happen. And, of course, I understand there are several people
that did not have an opportunity to raise questions, but what I
would suggest is that you put the questions to the Secretary in
writing and he will answer, because, if not, then the second
witness we will not be able to hear from at all, and I think
that would be----
Mr. Chaffetz. Mr. Chairman, if I could be so bold, my guess
is, if we were to survey or talk to the people on the panel,
particularly people who haven't had a chance to ask questions,
I think, with all due respect, we would much rather hear from
the current Treasury Secretary than the past Treasury
Secretary, whose schedule is probably a little bit more
flexible than the current Treasury Secretary.
Chairman Towns. I understand that, but the point of the
matter is that we have a hearing that has been scheduled and,
of course, has been structured. I wish we could stay here and
allow everybody to do that, but the point is that I think in
this situation----
Mr. Chaffetz. Mr. Chairman.
Chairman Towns. I would be delighted to yield to the
gentleman again, yes.
Mr. Chaffetz. And I appreciate it, because you have always
been so fair and very generous, and personally very good to me.
Is there a way that we could vote on which direction to go on
this?
Chairman Towns. Well, you know, it is actually up to the
chairman, but let me say what I would like to do. I would give
a minute to two on this side and a minute to two on this side,
and that is it. I mean, we have to move forward. We have a
scheduled hearing that is here looking for certain
information----
Mr. Kucinich. Would the gentleman yield?
Chairman Towns [continuing]. Looking for certain
information. In order to get the information, we need to talk
to the present Secretary, we need to talk to the past, and, of
course, we have others that we still want to----
Mr. Kucinich. Would the gentleman yield?
Mr. Fortenberry. Mr. Chairman, I join with you in that
unanimous consent for 2 additional minutes per side equally
divided.
Mr. Kucinich. Reserving the right to object. Mr. Chairman,
I just want to say that any member of this committee has the
ability to submit questions in writing. Mr. Geithner, in
response to an earlier question, said that, in the interest of
time, that he would be willing to answer questions in writing.
Is that not true, Mr. Geithner?
Secretary Geithner. Absolutely. Of course.
Mr. Kucinich. OK. So, Mr. Chairman, anybody who wouldn't
get a chance to ask a question here can still put it in
writing. I withdraw any objection.
Chairman Towns. Let me just say that we will go two on this
side, two on that side, but a minute, remember.
Mr. Fortenberry. Mr. Chairman, reserving the right to
object.
Chairman Towns. I don't know what you are objecting to.
Mr. Fortenberry. If you would recognize me. The unanimous
consent request for 2 minutes each. I would be happy, Mr.
Chairman, to forego my time with Secretary Paulson to ask
Secretary Geithner----
Chairman Towns. Well, I wish we could operate that way,
but, you know, when you have hearings that are structured, they
are not structured in the fact that someone would give up their
time. I mean, that is not the way we do it. So the point of the
matter is that we either accept the 2-minutes on each side or
we move forward. OK? So that is what is on the table--2 minutes
on this side, 2 minutes on that side.
Mr. Fortenberry. I withdraw my objection.
Chairman Towns. Designate the two on this side.
Mr. Connolly, you have a minute to raise one question with
the Secretary. Mr. Connolly from Virginia.
Mr. Connolly. Thank you, Mr. Chairman.
Chairman Towns. Recognized for 1 minute.
Mr. Connolly. Thank you, Mr. Chairman.
Mr. Geithner, we only have 1 minute. One has the sense that
some people in this room perhaps want to rewrite history, and I
understand, given the history, why they might want to do that.
In your opening statement you talked about the need for
financial regulatory reform. Could you expand on why we need
that, particularly when it comes to regulating that which was
resisted from regulation in the past, like derivatives and
credit default swaps?
Secretary Geithner. I don't think it is a hard case to
make. I think you just have to look at the wreckage caused by
the crisis to say the system failed dramatically. And, again,
the two most simple failures that happened is people were
allowed to take risk without constraints. We let a system
operate where institutions that were huge and consequential
operated with no adult supervision, with no constraints, and
they brought the country to the edge of collapse.
Let me just say one thing in common with the following
firms. Fannie and Freddie, the largest investment banks in the
country; AIG, a set of specialized insurance companies, a whole
range of consumer finance companies, a bunch of thrifts. They
all had one thing in common, which is they were not subject to
a set of sensible rules to constrain the risks they could take.
What we propose in financial reform is to change that. It
is a simple imperative. That is not enough though, because
people will make mistakes in the future. So we need to make
sure, when they make those mistakes, that we can let them fail
and failure can happen without catastrophic damage. We need to
be able to contain the damage, isolate it, draw a line around
it, put them out of their misery, put them out of existence
without the taxpayer being exposed; and we need to make sure
that we don't have a system where the taxpayer is exposed to
the risk of loss or that investors and creditors live with the
expectation the Government will be there again.
And, again, that is something that I think we all have a
huge obligation and responsibility. It was the laws of the land
that allowed that to happen, the laws of the land that made it
impossible for the Government to act, and I think we need to
work together to change that.
Mr. Connolly. I thank the gentleman and I thank the
chairman for his consideration.
Chairman Towns. Thank you very much.
I now recognize Mr. Fortenberry for 1 minute.
Mr. Fortenberry. Thank you, Mr. Chairman.
Mr. Secretary, welcome. For the last year and a half we
have been privatizing profits and socializing risk, and if the
optics on the AIG aren't bad enough, the counterparties to the
AIG, who received 100 parity for their liabilities, 7 of the
top 10 are foreign firms. Societe Generale was the top
recipient of $16.5 billion of American taxpayer bailouts, in
effect, followed by Goldman Sachs.
Now, you said this economy is in crisis. This year, Goldman
Sachs will give $16 billion of bonus payments, about $500,000
per employee. This is really difficult to understand why there
wasn't, at first, a desire to have transparency in regards to
counterparty transactions. Would you address that, please?
Secretary Geithner. Oh, I am not sure if you were here for
that part of the conversation.
Mr. Fortenberry. I have been here the entire time.
Secretary Geithner. OK.
Mr. Fortenberry. Except for votes.
Secretary Geithner. But, again, the actions we took were
necessary in the public interest, better than the alternatives,
to help prevent catastrophic damage. And if you are outraged,
as I think you should be, about how the economy and our system
was in this mess, I hope you will join with us in trying to
work to make sure it doesn't happen in the future. This is not
something that should be Republican or Democrat.
There is a deep, I think moral, obligation we have to try
to make sure that we put in place reforms that will prevent
this from happening again. If the Government had done that
sooner, this would have been less damaging. And a critical part
of the failure was we ran a country, largest economy in the
world, largest financial system in the world, without having
the kind of bankruptcy type powers we had for banks for
decades. And that is something that----
Mr. Fortenberry. Let's try to do that on a bipartisan
basis, sir, please. But you understand why----
Chairman Towns. I am sorry, the gentleman's time has
expired.
Now I recognize the gentleman from Illinois, Congressman
Davis, for 1 minute.
Mr. Davis. Thank you very much, Mr. Chairman.
Thank you, Mr. Secretary. Let me just ask if you had to do
it again, to do it all over, would you change any of the
decisions that you made in the fall of 2008 to rescue AIG and
pay the counterparties par?
Secretary Geithner. Congressman, again, I think about this
a lot, and one of the great strengths of our country is, again,
people have to look back and come to their own judgment whether
we made the best choices. But I am very confident that we made
the best of a set of terrible choices; that there were no
better alternatives. We did not have the option of bankruptcy;
we did not have the option of defaults; we did not have the
option of selective haircuts. It would have been catastrophic
to let the institution fail. We didn't rescue AIG; we
intervened so that we could dismember it safely, without it
wrecking the country and the system.
I think the big mistakes we made as a country, and they are
mistakes that we have to reflect on deeply for a long time,
were why the Government didn't act sooner to limit risk-taking,
why the Government didn't provide competent authorities the
ability to contain risk-taking, and why didn't we have in place
the kind of tools we have had for a long time for banks to try
to deal with these kinds of failures. I think those were tragic
mistakes.
The lesson of financial crises is if you don't act sooner,
things get to the point where they can cause catastrophic
damage; and if you let it, if you stand back and hope it will
burn itself out, correct itself, it will be a good, healthy
adjustment for the economy, that can cause enormous damage, and
it will cause enormous damage not just to the American lives
and people will be living with for a long time, but to the
revenue base of the country, deeply impairs the capacity for
Government to do things that are necessary like we need
resources for, protect national security, make sure teachers
can be in the schools. These things are deeply connected. If
you stand back and try to hope the market will fix itself, you
court catastrophe. I hope we learned that lesson. It should
never happen again.
Chairman Towns. Thank you very much. The gentleman's time
has expired.
I now recognize the gentleman from Utah, Mr. Chaffetz.
Mr. Chaffetz. Thank you, Mr. Chairman.
Thank you, Mr. Secretary. I was going to ask about the 18
phone calls you made to Rahm Emanuel, more than any other
Member of Congress, but we will have to save that for another
day. What I would like to ask you about is this idea that they
are going to make profits. I am going to read two statements
and ask you a question, from Neil Barofsky's testimony that is
coming up.
First one is, on page 13, ``Treasury's own TARP financial
statement estimates that Treasury will not be made whole, but
is rather projected to lose more than $30 billion on its AIG
investments.''
Second quote, later in the same paragraph, ``Narrowly
asserting that taxpayers will be ``made whole'' on Maiden Lane
III--just one part of the AIG counterparty transactions--
without mentioning the huge losses Treasury expects to suffer
on other, inextricably linked parts of the very same
transactions is simply unacceptable; the American people
deserve better.''
So my question, and I am hoping that you can respond to
those two statements, is when you refer to profits from the AIG
counterparty bailout, are you counting the cost of the $35
billion in cash AIG handed over to the counterparties or just
the $27 billion they got directly from the New York Fed?
Secretary Geithner. Congressman, I think that Mr. Barofsky
and I actually agree on this, and I said in my statement--I was
very clear--the Government is still exposed to substantial risk
of loss on its investments in AIG. The Federal Reserve in this
transaction, I think more generally, is unlikely to face any
loss. That is a good thing. We should welcome that.
But the Government is still exposed to risk of loss. We
don't know how large those losses will be. What we refer to is
not a projection, it is just an estimate based on current
market prices. But the really important thing--and I hope you
will join us in this--is if we adopt this financial
responsibility fee, the taxpayer will not bear a penny of the
burden for what we did----
Mr. Chaffetz. Sounds like a tax to me. It doesn't sound----
Secretary Geithner [continuing]. Under the TARP.
Mr. Chaffetz. Sounds like a tax to me.
Secretary Geithner. Well, you can call it what you want,
but what it is is a principal.
Mr. Chaffetz. I call it a tax, and I wish you would too. I
call it what it is.
Secretary Geithner. Well, again, in the law that Congress
passed authorizing these actions, Congress required the
Secretary of the Treasury to propose a way to make sure
taxpayers are held harmless. We did that. I hope you will join
us in supporting that because there is no reason why the
American taxpayer should be exposed to a penny of loss in what
we did in AIG. We can make that possible.
Chairman Towns. The gentleman's time has expired.
Thank you very much for your testimony, Mr. Secretary, and,
of course, you may be excused.
Now we call upon our second panel.
[Pause.]
Chairman Towns. The second witness for today's hearing is
former Treasury Secretary under the Bush administration,
Secretary Henry Paulson.
Mr. Paulson, please stand as I administer the oath.
[Witness sworn.]
Chairman Towns. You may be seated.
Let the record reflect that he answered in the affirmative.
I will ask the witness to summarize his testimony in 5
minutes. Of course, we know the procedure; the yellow light
means you have a minute left and the red light means stop.
Then, of course, we will have time to raise questions with you.
You know the procedure; you have been through this quite a few
times, so good to have you back.
STATEMENT OF HENRY M. PAULSON, JR., FORMER SECRETARY, U.S.
DEPARTMENT OF THE TREASURY
Mr. Paulson. Mr. Chairman, thank you, and I will go through
this quickly.
First of all, Chairman Towns, Ranking Member Issa, and
distinguished members of the committee, I appreciate the
invitation to testify before this committee. I was Secretary of
the Treasury in 2008. In that role, I had the privilege to work
with many talented men and women in Government and the private
sector who labored to pull our Nation back from the brink of
disaster.
The decision to rescue AIG was correct, and I strongly
supported it. An AIG failure would have been devastating to the
financial system and to the economy. Today's hearing relates
the payments to AIG's credit default counterparties. I was not
involved in any of the decisions made with respect to those
payments, nor was I involved in any of the decisions about
AIG's public disclosure of those payments. Those matters were
handled by the Federal Reserve Bank of New York and the Federal
Reserve Board. They sought to make appropriate decisions on
those matters and I am confident that this review will show
that they did.
I have limited knowledge on the topics of immediate
interest to the committee, but I will share the following
observations.
The rescue of AIG was necessary and I believe that we in
the Government who acted to rescue it, including Secretary
Geithner, Chairman Bernanke, and me, acted properly and in the
best interest of our country. The reasons the rescue of AIG was
necessary are well worth examining. I believe they are
representative of the causes of other aspects of the crisis and
indicate where regulatory reform is necessary.
There are three reasons we needed to save AIG that stand
out in my mind. First, AIG was incredibly large and
interconnected. It had a $1 trillion balance sheet, a massive
derivatives business that connected it to hundreds of financial
institutions, businesses, and governments; tens of millions of
life insurance customers; and tens of billions of dollars of
contracts guaranteeing the retirement savings of individuals.
If AIG collapsed, it would have buckled our financial system
and wrought economic havoc on the lives of millions of our
citizens.
Second, AIG was seriously underregulated. Although many of
AIG's subsidiaries, including its insurance companies, were
subject to varying levels of regulation, the parent entity was,
for all practical purposes, an unregulated holding company.
Consequently, there was no single regulator with a complete
picture of AIG or a comprehensive understanding of how it was
run. It was not until AIG started to fail that regulators began
to understand how badly managed it had been and how much the
toxic aspects of parts of its business had infected otherwise
healthy parts.
Third, AIG could not be effectively wound down. Unlike
failed depository institutions, which can be taken over by the
FDIC with little or no harm to depositors, or the GSEs, which
were seamlessly placed into conservatorship by Treasury and the
Federal Housing Finance Agency, there was and is no resolution
authority available to wind down a failing institution like
AIG. The only option is bankruptcy, a process that is simply
not capable of protecting the millions of Americans whose
finances are intertwined with AIG's.
The Government rescue of AIG in the fall of 2008 was
directly shaped by these realities. We had to protect the
economy and the finances of millions of Americans. We could not
have anticipated the magnitude of AIG's problems and we had no
way of letting it fail without disastrous collateral
consequences. We had to intervene, and I am thankful we did.
I do not mean to say that I am happy we needed to
intervene. Taxpayer money should not have to be spent to save a
misguided and mismanaged enterprise. But the fundamental
problem lies not in how we intervened, but why we needed to
intervene. We need to modernize our regulatory structure by
creating a systemic risk regulator and resolution authority so
any large firm that fails can be liquidated without
destabilizing the system. Large financial institutions of this
country will always play a role that is essential to our
economic growth, but they must only be permitted to grow and
interconnect throughout our economy under careful oversight and
with a mechanism for allowing those connections to be broken
safely.
Thank you, Mr. Chairman, and I would be happy to answer any
questions.
[The prepared statement of Mr. Paulson follows:]
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[GRAPHIC] [TIFF OMITTED] T3136.085
Chairman Towns. Thank you very much for your testimony.
Let me say that you were deeply and aggressively involved
in dealing with the financial crisis. We saw that with AIG, of
course, and Bank of America, and with the TARP. My question is
why did you sit on the sideline and not use your considerable
influence to call the CEOs of the counterparties to get them to
take a haircut? Why wouldn't you do that? I mean, you are a
person that was very influential in all of this, and I can't
understand why you wouldn't do that.
Mr. Paulson. Well, Mr. Chairman, as you indicated, I had no
involvement at all in the payment to the counterparties, no
involvement whatsoever. Now, to explain this, we worked very
collaboratively during the crisis. There was a lot going on,
coming at us from all sides, and whichever agency had the
authorities took responsibility for execution. And this was
clearly a case--it was a Federal Reserve loan. They had the
authority to make it and administer it, and they had the
technical expertise to do the restructuring.
Chairman Towns. But I just see it a little strange that you
would sit on the sideline and not help the American people in
terms of--I mean, you were so involved in the early stages and
throughout the process----
Mr. Paulson. Mr. Chairman----
Chairman Towns [continuing]. And then to sit on the
sideline at a time like this, I just find that----
Mr. Paulson. Mr. Chairman, anybody that knows me knows I
was not sitting on the sideline. I was not involved in this
issue, but I was involved in many other issues every single day
of the week, including weekends. So I didn't spend----
Chairman Towns. Why not? Why wouldn't you be involved in
this?
Mr. Paulson. Because this was a Federal Reserve loan; they
had the authority, they had the technical expertise. As I said
in my testimony, I have great confidence in the
professionalism, the integrity, the motives, the abilities of
the people that were handling this. So this was their job to
handle and I was working on many other things which were in my
bailiwick.
Chairman Towns. Let me ask another question. Why wouldn't
you let AIG go into bankruptcy? Why not?
Mr. Paulson. If AIG had failed--this was a huge financial
organization, interconnections throughout the economy. If it
had failed, with the system as fragile as it was, I believe it
would have taken down the whole----
Chairman Towns. Can you talk directly into the microphone?
They are having problems hearing you.
Mr. Paulson [continuing]. I believe it would have taken
down the whole financial system and our economy. It would have
been a disaster. Today, after all the actions that have been
taken by the U.S. Government, we still have this terrible 10
percent unemployment level. I believe that if the system had
come down and failed, we could easily have had unemployment
reaching or exceeding the 25 percent level we had in the Great
Depression; we would have lost many additional billions of
dollars in American savings; home prices would be much lower
than they are today.
So as unattractive as the Government rescue of AIG was--and
none of us that supported that found that to be an attractive
or desirable option--it was just much, much better than the
alternative, which would have been economic disaster in this
country.
Chairman Towns. I now yield 5 minutes to the gentleman from
California, the ranking member.
Mr. Issa. Mr. Chairman, I would ask that we go to the
Members who did not have an opportunity in the first round. Mr.
Chairman, I would also ask this one thing. Will you agree,
since the Secretary said he would answer our questions, to join
with me in ensuring that all questions are answered or that we
bring the Secretary back, assuming he does not answer them for
some reason?
Chairman Towns. So ordered.
Mr. Issa. Thank you.
Mr. Luetkemeyer would be next of those waiting.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Mr. Paulson, one of the things that we are looking into
here with AIG, can you explain to me, AIG and their Financial
Products, was that a subsidiary of AIG or was that part of
their business model?
Mr. Paulson. I believe it was part of the business model.
Mr. Luetkemeyer. There wasn't a separate entity that was
separately capitalized?
Mr. Paulson. It was clearly at the holding company and it
was part of----
Mr. Luetkemeyer. The thing that makes----
Mr. Paulson. It wasn't part of an insurance business model,
but it was sure part of the company's business strategy.
Mr. Luetkemeyer. Because it makes a big difference. If it
is not part of the insurance product company and it is a
subsidiary that is separately capitalized, you can let that
thing go down and it doesn't impact the insurance part of it,
which I believe it was. Is that not correct?
Mr. Paulson. Well, I would say this to you. This company
was so big and intertwined that it was--if there was any way
that the people who were working on this could have found a way
to just hive off and let one small part of the company go
down----
Mr. Kucinich [presiding]. Would the gentleman suspend? Mr.
Paulson, excuse me. We want to make sure that Members can hear
your testimony.
Mr. Paulson. OK.
Mr. Kucinich. You know, it is amazing with so much money in
this Federal Government, we don't have a better sound system.
But I am going to need you to speak as closely to that mic as
you can so everyone can hear you.
Mr. Paulson. OK.
Mr. Kucinich. Thank you. You may continue.
Mr. Paulson. So to just be clear, there was no way to hive
off and handle this situation differently. There was a very few
days to act to prevent bankruptcy with no wind-down powers to
let this company be liquidated and avoid bankruptcy.
Mr. Luetkemeyer. Well, with all due respect, if it is a
separate entity, a subsidiary, it could go beyond and the rest
of it could still stand on itself, sir, but that being----
Mr. Paulson. Well----
Mr. Luetkemeyer. Let me move on with another question very
quickly. In Secretary Geithner's testimony, he indicated that
he felt that, contractually, the contracts that we had, the
investments that were made by foreign banks into AIG, that they
were involved with, needed to be adhered to and worked with.
Was the Government a part of those contracts?
Mr. Paulson. As I have said in my testimony, I had no
involvement with the payment of any of those contracts. I just
was not involved in that matter.
Mr. Luetkemeyer. So the Government wasn't a party to the
contracts, then.
Mr. Paulson. What?
Mr. Luetkemeyer. The Government wasn't a party to the
contracts.
Mr. Paulson. Again, this was not something that I was
directly involved in. I said that I very much trust the motives
and the abilities and the judgments of the people that made
those decisions, but I wasn't party to them and I can't answer
that question.
Mr. Luetkemeyer. OK. Well, that's one of the frustrations.
I appreciate your candor, but my frustration with the Chair in
that we don't get full testimony and be able to get all the
questions asked and then answered so we can come to you with
what we feel is good information to be able to get some good
back and forth here. So I apologize to you.
Let me move on to something else. I know right now we are
looking at, and the President has proposed, some too-big-to-
fail sort of strategies to try and address the issue of too-
big-to-fail. Where are you in this debate? What do you think
about the proposal that is on the table right now, sir?
Mr. Paulson. When I was Secretary of the Treasury, I put
out a regulatory blueprint, and I still believe that is the way
to go. I am very--I think it is essential that we have wind-
down authorities, resolution authorities so that any financial
organization, no matter how big, can be liquidated outside of
the bankruptcy process without taking down the rest of the
economy.
So I think that is essential, and there are some parts of
the proposals that are up here being debated by Congress which
are the same as in the regulatory blueprint we put forward, a
big one being the systemic risk regulator, and I am strongly in
favor of a systemic risk regulator.
Mr. Luetkemeyer. Do you believe that we need to take the
risk investments that are part of many of the big banks right
now and take them off the books and have a subsidiary for this,
so we can go back to Glass-Steagall firewall there?
Mr. Paulson. That is not my recommendation. I believe that
when you look at the crisis, what I saw in the crisis was that
it was across a number of types of financial institutions, and
the excessive risk-taking I saw was not limited to one business
activity, it was much broader than that, and I think we need a
broader approach. So, again, what I favor is a systemic risk
regulator and wind-down authorities is the way I would handle
that.
Mr. Luetkemeyer. Well, one of the problems I have with what
you are suggesting, sir, is that suddenly now we have the
taxpayers, through FDIC insurance, on the hook for these risk
takers who are out here. I think it is important that we take
these things off the books and have a subsidiary. If it goes
down, it goes down and the banks and the insurance funds and
the taxpayers as a whole are not on the hook for all this. I
think it is very important we go down that road, because I
think what you have done with AIG is suddenly used the Federal
Government as the official underwriter of all investments in
the world. If we are underwriting foreign contracts,
investments, what have we done? We have gone down that road.
I appreciate your comments and I yield back to the Chair.
Mr. Kucinich. The gentleman's time has expired.
The Chair, in keeping with the necessity of making sure
that Members who did not ask questions the last round, are
given a chance to go first. We recognize Mr. Tierney. Thank you
for your patience and you may proceed for 5 minutes.
Mr. Tierney. Thank you, Mr. Chairman.
Mr. Paulson, thank you for being here this morning. So you
were in full agreement with not allowing AIG to go bankrupt.
Mr. Paulson. Absolutely.
Mr. Tierney. I think, back home, people don't know where to
give the credit for this, so I want to make sure we give credit
where credit is due if that was a good decision. People see Mr.
Geithner now as Treasurer, and they think the decisions were
all made by him when he was Treasurer. In fact, these were
decisions made in 2008. You were President Bush's Secretary of
the Treasury, correct?
Mr. Paulson. Absolutely.
Mr. Tierney. And Mr. Bernanke was the head of the Fed.
Then, of course, we had the New York Federal Reserve Board
participating in these conversations as well. So you were
pretty much the group that decided that they should give $85
billion in September to AIG. Those were mostly the
participants, am I right?
Mr. Paulson. Yes. As I said in my testimony, I very much
supported that rescue.
Mr. Tierney. And then in November it was the same group--
you, as President Bush's Secretary of the Treasury, Mr.
Bernanke, and the New York Fed--decided to give additional
funds to AIG, some of which we used to pay the counterparties
to the contracts, right?
Mr. Paulson. Yes. In November, in the TARP, we made a $40
billion capital investment, and then the Fed put some
additional money in, which was used up for the contracts.
Mr. Tierney. Just so we are clear--we are giving credit
here--the TARP, the $700 billion in TARP, in fact, was during
your term as Secretary of the Treasury under President Bush.
Mr. Paulson. Yes. I am proud of that. So that----
Mr. Tierney. That was your idea, was it, the TARP?
Mr. Paulson. It was a number of our ideas, but, yes, and
that is something I am proud of and something that was very
necessary.
Mr. Tierney. And the $85 billion that was loaned to AIG was
not appropriated by Congress; nobody asked Congress to make a
vote on that, am I right?
Mr. Paulson. No, that was a decision taken by the Fed with
the support of----
Mr. Tierney. What source of money did they use to get that
$85 billion?
Mr. Paulson. They used their funds.
Mr. Tierney. And their funds emanate from where?
Mr. Paulson. From the U.S. Government.
Mr. Tierney. Well, were they fees from other banks, did
they come from your Treasury? Where did they come?
Mr. Paulson. They come from--the Fed, obviously, can print
money.
Mr. Tierney. OK. And did they take money that they had from
fees charged to member banks or did they print money to
accommodate this $85 billion?
Mr. Paulson. You would have to ask the Fed that.
Mr. Tierney. You are not aware through any discussions
where that was?
Mr. Paulson. I would like them to answer that question.
Mr. Tierney. Well, you may not like to answer the question,
sir, but if you know the information, I am asking you to share
with us what is your best understanding of where that money
came from.
Mr. Paulson. My best understanding is all dollars are
green, so those are ultimately taxpayer dollars, and that was
why----
Mr. Tierney. We are painfully aware that they are taxpayer
dollars, sir.
Mr. Paulson. That was why the Treasury was supportive and
we were very supportive of that transaction.
Mr. Tierney. OK, we all understand that the full faith
promise comes from the Government on that and they were
taxpayer dollars, we are painfully aware, but I am asking you
whether, since they didn't come to Congress for an
appropriation, whether the $85 billion came from fees charged
to member banks, was newly printed money, or some combination
of the both.
Mr. Paulson. I don't believe it came from fees charged from
member banks.
Mr. Tierney. All right, thank you. Now, we got to the point
where a decision had to be made about whether or not to let AIG
go bankrupt. Later it came to a point whether or not to pay the
counterparties 100 percent on those contracts or not. But once
the decision was made not to let them go bankrupt, you lost any
leverage, really, to argue in terms of getting--being able to
pay less than 100 percent. Is that a fair statement?
Mr. Paulson. As I said, I didn't participate in those
decisions regarding payment, and I also said we didn't have the
wind-down powers.
Mr. Tierney. But you were involved--I forget how many
Congresswoman Kaptur said that there were phone calls between
the New York Fed and you.
I will yield.
Ms. Kaptur. 225.
Mr. Tierney. 225 telephone conversations between the head
of the New York Fed and you during this period of time, so I
think we might be fair in assuming that you were discussing
some of these matters?
Mr. Paulson. Well, we had many matters to discuss----
Mr. Tierney. And this was one of them, right?
Mr. Paulson [continuing]. Over a range of things, and the
matters we discussed--we clearly discussed the rescue. As I
said, I did not have involvement and was not discussing----
Mr. Tierney. Here is my final question. I need your help
with this. Most people at home hear people draw the conclusion
that not to allow AIG to go into bankruptcy would have been
devastating because the consequences would have been severe. It
would be enormously helpful if you could put yourself in the
position of the local bookkeeper for a medical firm or
housekeeper or lawyer or teacher's aide. How specifically would
that individual have been harmed if you had not made the
decision to not allow AIG to go bankrupt? What would have been
the consequence to them?
Mr. Paulson. And that is the right question, Congressman,
because they were the real victims. They would have lost jobs,
would have lost----
Mr. Tierney. But how? How would that have happened? Show
me, from the time you made the decision, what would it have
spiraled down to affect their lives.
Mr. Paulson. Well----
Mr. Kucinich. The gentleman's time has expired, but the
witness would be pleased to answer his question, I hope.
Mr. Paulson. OK. What I believe, we were--at around the
time of the AIG rescue, when markets were frozen, we had a
situation in this country where even blue chip industrial
companies were having trouble financing. I knew we were on the
brink. That if AIG had gone down, I believe that we would have
had a situation where Main Street companies, industrial
companies of all size would not have been able to raise money
for their basic funding, and they wouldn't have been able to
pay their employees, they would have had to let them go.
Employees wouldn't have paid their bills. This would have
rippled through the economy.
Today, Congressman, we have, after everything that was
done, all the resources, we have 10 percent unemployment. I
believe we easily would have had 25 percent unemployment. Today
we have home prices that have dropped precipitously in some
parts of the country. Home prices would have gone much lower.
AIG guaranteed tens of billions of dollars of savings for
retirement savings for Americans. There would have been great
losses. This would have been an economic nightmare.
Mr. Kucinich. Thank you, Mr. Paulson.
Mr. Tierney. Thank you.
Mr. Kucinich. The Chair recognizes Mr. Souder.
Mr. Souder. Thank you. I have a variation of the same
question you were just going through, because one of the
problems we have is that it appears that AIG was treated
differently than other companies throughout this whole thing in
this sense, that the holders of the debt were paid at par,
which means that, in effect, the banks got 100 percent but, for
example, GM creditors, small businesses all across America, and
other companies that were let go, they got 10 cents on the
dollar or 30 cents on the dollar; and it is part of a fact, a
perception that was unfair, that Wall Street was covered but
Main Street wasn't, in debt.
Now, AIG was different in what sense? Now, I know--was it
120 separate finance companies and 80 insurance, or is that
flipped? Something like that. In other words, it was a
collection, it wasn't one.
Mr. Paulson. It was a big complex collection of companies,
correct.
Mr. Souder. And that if the insurance divisions were
separated and came under State, part of the argument is State
regulation, that they were so intertwined with the finance.
But let me ask one other question before we get into
details of that. You said bankruptcy wasn't an option, but it
also meant that did you try to put pressure on the people who
held the debt to write down some of their debt, or once you
made the statement ``we weren't going to let it fail,'' were
they just playing hardball in saying we weren't going to write
down anything? Why didn't they get the same pressure that GM
suppliers had and everybody else to write down their debt?
Mr. Paulson. As I have said--and this isn't me trying to
suggest anything was done wrong--I had nothing to do with that,
so I was not involved in the negotiation. I was not involved in
anything surrounding those payments. But I will explain one
thing to you which is fundamental for you to understand is the
Government--we have an antiquated regulatory system and a lack
of the necessary authorities. So if there was a bank, there is
a way to wind that down. But this was a non-bank and there
was----
Mr. Souder. OK, I understand that. Let me----
Mr. Paulson. There is no way to avoid it.
Mr. Souder. Let me ask you--there is no way except the
threat of real bankruptcy. If you are a bank and think you can
negotiate at par and get a full percent, and you don't have a
threat of bankruptcy, the question is did anybody threaten
them?
Did anybody say that we are not going to--I mean, did we,
in effect, yield the debate at the beginning, they played
hardball, and we had no way to do it; that if in effect you
would have even threatened to say, hey, we can cover the
insurance people, but the finance side over here, you better
negotiate down or that side will go bankrupt, and then you
would wind up probably having to do what we did in TARP anyway,
which was put cash reserves into the banking system to try to
cover the fact that the bankruptcy went out.
Would that not be true? In other words, had they gone
bankrupt and there really was a catastrophic threat--which I
believe, because I voted for TARP--a catastrophic threat,
wouldn't you have just had to put more money in the banking
system, but not necessarily at par?
Mr. Paulson. As I said, Congressman, I wasn't involved in
that, so I can't----
Mr. Souder. You are saying the New York Fed did that.
Mr. Paulson. I can't comment beyond what I have said.
Mr. Souder. When you got involved, once TARP was there, the
decision was already made that it wasn't going to go bankrupt,
is that correct?
Mr. Paulson. When I--first of all, I was involved in
supporting the initial rescue, and then----
Mr. Souder. So you were involved. Just a second. You were
involved?
Mr. Paulson. Yes.
Mr. Souder. And did you advise the Fed to try to get what
they could and not to pay at par?
Mr. Paulson. What the Fed--the initial rescue was not the--
was not when they dealt with the payment to counterparties. So
I supported the Fed on the initial loan, and then, later, in
November, the situation had deteriorated to the point and
values in insurance businesses all around the world had
deteriorated to the point that this was a company that would go
down without capital. So now we had capital and my team and I
participated in making that decision, made the decision to put
$40 billion of equity into AIG.
Mr. Souder. The problem that I have is that it appears to
me that AIG was treated differently, so much so. Even listening
to that, it is like, ``well, we put some money in initially and
then we put more money in because they couldn't fail;'' where,
in the other--everything from Citibank to Merrill Lynch to
everything else there were processes where there were
conditions on money coming in, where there were guidelines on
money coming in and they used the leverage of the threat of
bankruptcy to do that. Then, in this case, it appears that it
was different, and it partly is that the creditors were
different.
Furthermore, some of the critical information here was
withheld from being public at the request of the New York Fed.
Had that been public, people would have seen it. And there was
an attempt to even keep it quiet because that was critical,
that information, to understand what was going on behind. And
it is extremely frustrating to all of us on this committee--you
can hear it in different types of questions--about how this
came to be, and I don't think there has been a compelling case
made that AIG is unique.
Mr. Kucinich. The gentleman's time has expired, but I would
say that if Mr. Paulson wants to respond to the gentleman, you
may do so, and, if not, we will go to the next questioner.
Mr. Paulson. I have no response.
Mr. Kucinich. OK. I thank the gentleman.
The Chair recognizes Mr. Kanjorski.
Mr. Kanjorski. Thank you very much, Mr. Chairman.
Welcome back, Mr. Paulson. You really miss Washington, I
assume.
Mr. Paulson. You can't guess how much.
Mr. Kanjorski. I listened to the comments of the Secretary,
your successor, and now you, and I am listening to the Members'
questions and how much memory is lost in a year or 14 months
from those fateful days in September and October, which all of
us hope we never relive, but, in fact, were very much
significantly different than today, and the coolness of being
able to answer.
One of the questions I was particularly interested in,
because I was very involved at that time with AIG and what was
happening from my aspect of having some jurisdiction over
insurance, is that as I understand it, because of Financial
Products in London was without assets and had a tremendous
involvement in counterparty positions for about $2.8 trillion,
and whose counterparty positions were starting to fail and they
had to honor them, their initial internal decision of AIG was
to use the assets of the world's largest insurance company, and
they sought permission and it was pending and finally approved
by their regulator, the State of New York, to take assets out
of the insurance companies, about $30 billion, and use those
assets to cover their exposed counterparty and positions.
Now, if that had happened at that time, those insurance
companies would have failed because their assets would have
been taken, converted, and there wouldn't have been enough to
cover the counterparties, so it would have wiped out the
insurance companies, which in turn would have affected every
insurance holder in the country that was involved with AIG at
the time, and would have been a catastrophic collapse of the
insurance industry, notwithstanding the counterparty derivative
position.
Now, luckily, the regulator in the State of New York didn't
grant us permission to use that $30 million until much later,
when it was futile. At that point, the losses on the
counterparty positions, I think, rose to $55 billion and were
climbing on a daily basis, and that is when the infusion of
funds that you talk about, adding equity to AIG or the capacity
through the use of Government funds to cover those counterparty
losses. They didn't cover all those losses and, subsequently,
within probably 30 days, another huge amount of money was
infused into AIG's various corporate structures to get some
stability.
And not that I could say nothing has changed from that, but
that was the significant circumstances in this month or 2
months after September 18th that everybody was faced with. But,
as I understand it, the Federal Reserve was the person with the
checkbook under the incidence under 3.13 powers, they were just
plugging that money in.
And it wasn't a decision made at the Secretary's level of
Treasury or at the Presidential level, it was a Federal Reserve
regulator level that was making that decision; and I dare say
regulator not for AIG, but regulator that had regulation over
some of the largest banking institutions in the world, that if
their counterparty positions weren't honored, they would have
immediately collapsed. And that is what we were calling the
meltdown. Everything was going to implode and you had to stop
it at the headwaters, not wait until it got out to the little
dams out in the stream.
Is that relatively the correct position?
Mr. Paulson. I would say, without signing off on every fact
you mentioned, I would say you've got it in the sense that this
was a very complex company and there was--if it had gone into
bankruptcy, it would have been a huge mess and it would have--
one part of the company would have contaminated the other and
it would have rippled through the U.S. economy, and the result
would have been absolute disaster.
Mr. Kanjorski. Mr. Chairman, I know there are other
questioners. I have had the opportunity to ask some today, so I
yield back the balance of my time.
Mr. Kucinich. I thank the gentleman for his courtesy.
Before I recognize Mr. Bachus, I want to take the liberty,
as Chair, to recognize students from Padua Franciscan High
School in Parma, OH, visiting the Capitol and seeing their
government at work right here. So welcome, you and your teacher
and we are pleased that you stopped by for a visit. Thank you.
The Chair recognizes Mr. Bachus of Alabama.
Mr. Bachus. Welcome, former Secretary. Secretary Paulson,
March 2009, March 16th was when AIG was--the payments were made
to AIG or guaranteed. Leading up to that, you participated in
several meetings about AIG, is that correct?
Mr. Paulson. Prior to March of----
Mr. Bachus. Of 2009.
Mr. Paulson. Prior to March? Yes, I had a number of
meetings about AIG as we were putting in capital.
Mr. Bachus. I know one of the meetings--I am looking at
March 24th, my questioning of Mr. Geithner, he mentions,
Secretary Geithner, that you--he said that he and you met with
AIG to discuss Lehman's failure.
Mr. Paulson. To discuss what?
Mr. Bachus. September 14th. Now, that was 2 days before.
Mr. Paulson. Oh, yes. You are saying--you were talking
about March 2009. I think you are talking about September 14,
2008.
Mr. Bachus. That is right. OK. I stand corrected. That
discussion--but you participated in some of the discussions
about AIG and their financial condition leading up to----
Mr. Paulson. Yes. And that weekend of September 13th and
14th was the weekend when we had financial institutions
together working to come up with a solution to prevent the
failure of Lehman, and it was that weekend that we learned also
about AIG, and I had two meetings over the course of that
weekend at the New York Fed with Tim Geithner, with officials
from AIG.
Mr. Bachus. In those meetings, was there any discussion of
asking the counterparties to take less than 100 percent?
Mr. Paulson. Was there any discussion of what?
Mr. Bachus. Any discussion of the counterparties taking
less than 100 percent?
Mr. Paulson. I certainly don't recall any. We were talking
about the financial problems that AIG had and it was clearly--
they clearly had issues with counterparties.
Mr. Bachus. What?
Mr. Paulson. They clearly had issues with counterparties,
because that was the crux of the issue, a potential ratings
downgrade which would cause the company to have to post
collateral. So that would lead to----
Mr. Bachus. So the obligation to the counterparties was
discussed?
Mr. Paulson. Well, obviously, that was the issue. Any
institution that is facing failure is going to have an issue
with paying creditors.
Mr. Bachus. You know, once that intervention occurred, then
really the taxpayers, the U.S. Government owned 79.8 percent of
AIG, more or less. Is that correct?
Mr. Paulson. Yes.
Mr. Bachus. That being the case, I see in this same, March
15, 2009, this is skipping forward to March 2009. Secretary
Geithner emailed William Dudley and Edward Quince and he said,
``Where are you on the AIG counterparty disclosure issue? Are
you for disclosing or not?''
Mr. Issa. Would the gentleman yield? Could you put up slide
1 so they could see it? Thank you.
Mr. Bachus. What would your advice have been on whether or
not that should have been a public disclosure of the
counterparties and their obligations? And would the fact that
really the taxpayers own over 79 percent, almost 80 percent of
the company have made any difference?
Mr. Paulson. Well, as a general proposition, I am very much
for disclosure, but I wasn't part of this. I had nothing to do
with that decision. And I am not going to sit here now and
second guess others that were, you know, that I know people
with strong integrity and good will tried to do the right
thing.
Mr. Bachus. Well, just take a situation where you do have a
company that is, you know, 80 percent-owned by the U.S.
Government. Would that tend to make you think that there ought
to be disclosure of their obligations?
Mr. Paulson. Well, public companies----
Mr. Kucinich. The gentleman's time has expired, but you can
answer his question.
Mr. Paulson. I will be brief. Public companies have
disclosure obligations and that is governed by the SEC, and I
think those need to be adhered to.
Mr. Bachus. Thank you.
Mr. Kucinich. OK, I thank the gentleman.
The Chair recognizes Mr. Cummings of Maryland. You may
proceed.
Mr. Cummings. Mr. Paulson, good seeing you again. Let me
ask you this. Mr. Paulson, do you realize that a lot of the
American people believe that there is a sort of Wall Street
club, and that, let me finish, that you all play golf together
and you have a lot of fun, and then you, you know, when the
billions come around you are able to kind of distribute them.
I mean, I am just saying, do you know that is how people
feel?
Mr. Paulson. I sure do. And even though----
Mr. Cummings. Can you keep your voice up?
Mr. Paulson. I said even though I am not a golfer, I sure
know that is how people feel.
Mr. Cummings. Yes, and when they see these deals going on,
then the next thing they do is they begin to look at where
people work, and then they see the relationships and then they
say, well, you know, we don't have a chance because it seems
like they are kind of looking out for themselves, but not
looking out for us.
So, you know, you just gave a statement about transparency,
and, you know, and I think one of the things that bothers
people was when they don't see transparency, then they begin
not to trust. And when they begin not to trust, it becomes very
difficult for them to go along with any program.
And then when you put on top of that they can't see
themselves benefiting, and I know that you mentioned that if we
didn't do what we did, unemployment may have gone up to 25
percent, but it is hard for people to even see that.
You understand?
Mr. Paulson. Yes, I, Congressman, you have it. And that is,
people are very, very angry, and I understand it, why they are
angry, and they are rightfully so, because they don't see the
connection. And they don't recognize that what was done wasn't
done for the bank. They were going to be the victims if we
didn't step in.
Mr. Cummings. And so among the conditions in the TARP-AIG-
SSFI Investment Senior Preferred Stock and Warrant summary of
senior preferred terms, as posted on the Treasury Department's
Web site, the following condition was noted: ``The annual bonus
pools payable to senior partners in respect of each of 2008 and
2009 shall not exceed the average of the annual bonus pools
paid to senior partners for 2006 and 2007.''
Do you believe it was appropriate for Treasury to allow AIG
to create any bonus pool for senior partners, considering it
had just found it necessary to extend $40 billion to the firm
through the TARP?
Mr. Paulson. I am not going to get into second guessing
decisions that were made at Treasury about bonuses. I realize
this was a very difficult decision because the taxpayer had a
lot of money in this company.
Mr. Cummings. Right.
Mr. Paulson. And this company needed to perform well and
needed to hold the team together in order to repay taxpayers.
Mr. Cummings. Right, and the taxpayers were saying to
themselves, look, these are our tax dollars. We work hard for
these tax dollars and now these guys, who screwed up
everything, are getting bonuses.
Mr. Paulson. Yes, you are right. No one, me included, likes
to see private business profit from taxpayer assistance. That
makes people angry. And to me, I just hope that part of that
anger is not a diversion from what we need to do, but is an
incentive to fix the system so that we will have resolution
powers and never again will have a company that is so big, too
big to fail, so the taxpayer has to come and put money in; that
a company can be liquidated and wound down in a way in which
the taxpayer is not on the hook again.
But so I understand there is that anger out there and that
frustration. I think it is very understandable. And I think
there are a number of ways to do something about it, but the
best way to do something about it is reform the system so that
we don't ever again have to bail out a big institution, rescue
a big institution. It could be liquidated if it fails.
Mr. Cummings. Now, with regard to the original Treasury
TARP investment in AIG, was this structured as a loan or as an
equity investment?
Mr. Paulson. Congressman, it was an equity investment.
Mr. Cummings. And was this in the AIG parent holding
company or in the individual subsidiaries?
Mr. Paulson. This was in the parent. This was a $40 billion
equity investment because the company needed equity.
Mr. Cummings. And was it made subordinate to any other
creditors of AIG?
Mr. Paulson. Well, a preferred is by definition senior to
the common, and subordinated to the other creditors.
Mr. Cummings. And how does this compare to the various
Federal Reserve investments in AIG?
Mr. Paulson. Well, this is subordinate to the other Federal
Reserve investments in AIG because a determination was made.
The rating agencies had basically said that you need to put
capital in this institution or there will be a downgrade, and
then they would have precipitated the failure.
Mr. Cummings. And why was it structured in this way?
Mr. Paulson. It was structured in that way because that is
the way a preferred needs to be structured. It wouldn't have
been capital if it hadn't been subordinated to the other
liabilities.
Mr. Cummings. I see my time is up.
Thank you, Mr. Chairman.
Mr. Kucinich. I thank the gentleman.
The Chair recognizes Mr. Stearns from Florida. You may
proceed for 5 minutes.
Mr. Stearns. Thank you, Mr. Chairman.
Mr. Paulson, Mr. Geithner has testified that he recused
himself during this counterparty negotiation. Did you know that
while you were Secretary of Treasury?
Mr. Paulson. I knew that----
Mr. Stearns. Just yes or no.
Mr. Paulson. Yes.
Mr. Stearns. You did know. OK.
Mr. Paulson. Tim Geithner did not participate in any--I
didn't view him as a decisionmaker. I viewed him as recused.
Mr. Stearns. OK. Did he call you up and advise you that, I
have recused myself? Did he call you up?
Mr. Paulson. He----
Mr. Stearns. How did he notify you?
Mr. Paulson. Well, he told me on the phone that he did not
think it would be appropriate for him to be viewed as a
decisionmaker.
Mr. Stearns. Did you know he never got a letter? All he
did, he testified that he recused himself. He decided. He put
up a flag and said, I recuse myself; I am not going to be
involved with the counterparty negotiation. He didn't get a--
like you went to the White House Counsel and you went to
Secretary of Treasury, you got a letter. He never got a letter.
He never got a written confirmation of his recusal.
Did you know that? Do you know that he was just doing it on
his own by his own volition?
Mr. Paulson. I did not know the details.
Mr. Stearns. OK. Did you think a person who would recuse
himself in this crisis we had, that he could go about and
operate in his present job and not have a conflict of interest?
Did it ever occur to you to say, ``gee, the chairman of the
Federal Reserve is in this crisis; we are having the
counterparty negotiations, and by golly, he is going to step
aside and says he knows nothing about it.'' That is what he is
saying today. Doesn't that seem sort of fakey to you?
Mr. Paulson. No, it didn't, because I thought it was an
extraordinary position we had to have a presently New York----
Mr. Stearns. OK, I understand. Now, the next question in
open testimony that his chief of staff, while he was chairman
of the Federal Reserve, was a former employee of Goldman Sachs.
Did you know that?
Mr. Paulson. Yes.
Mr. Stearns. Did you ever call his chief of staff, former
employee of Goldman Sachs, during the process for the
counterparty negotiations? Did you ever call him? If I go
through the logs, will I see your name calling him?
Mr. Paulson. His chief of staff, who is a former employee
of Goldman Sachs----
Mr. Stearns. And he worked for you when you were CEO.
Mr. Paulson. He didn't take on that job until after I had
left, and he had become Treasury Secretary.
Mr. Stearns. Did you ever call him at all? If I go back to
the logs, will I find that you called Geithner's chief of
staff, former employee of Goldman Sachs, during the
counterparty negotiations?
Mr. Paulson. Yes, I, no, I didn't.
Mr. Stearns. You never called him?
Mr. Paulson. As I said, the former--his chief of staff, I
think is the person you are referring to----
Mr. Stearns. We didn't know about it until today.
Mr. Paulson [continuing]. Is someone who became his chief
of staff when he became Treasury Secretary after I had left
office.
Mr. Stearns. No, he said that while he was at the Federal
Reserve, he was his chief of staff. That is what he said today.
Mr. Paulson. I don't believe that was the case.
Mr. Stearns. OK. All right.
Mr. Paulson. But in any event, when he was----
Mr. Stearns. OK, let me just go on. I have the time.
Mr. Paulson. I talked with Tim.
Mr. Stearns. Here is the problem I think a lot of us are
having. Mr. Geithner said he was not involved with the
counterparty negotiations. You are saying you were not
involved. Oh, yes, you heard a little bit about it, but on
November 6th when they gave $62 billion to all these parties
who came in and looted AIG, all you guys say, I knew nothing
about it. And yet it appears that this happened.
Now, recently Michael McRaith, who is director of the
National Association of Insurance Commissioners, told the
Senate Banking Committee, he said, you know, if AIG had gone in
bankruptcy, we would have taken care of it. It would have been
an orderly disposition. This is what he said: ``AIG's insurance
operations and their other companies would have simply--we
would have simply bought up AIG's insurance assets, allowing a
seamless delivery of AIG's insurance obligations.''
So the question is, considering that the State Insurance
Commissions would likely have seized AIG's insurance
subsidiaries, protected policyholders in an AIG bankruptcy, why
was it necessary to bail out AIG with taxpayers' money, based
upon the testimony of the director of the National Association
of Insurance Commissioners?
Mr. Paulson. I respectfully disagree with him, and I
believe that it is----
Mr. Stearns. So you disagree with this guy, with all his
knowledge, his years of experience?
Mr. Paulson. I will just say many people with years of
experience had some regulatory responsibilities with regard to
AIG, but this company was had a huge problem, and it is case
No. 1 on what is wrong with our regulatory system. There was no
single regulator that had a line of sight on the total company.
So there were regulators that looked at different pieces of it,
and if the company had gone down, it would have been a huge
mess.
Mr. Stearns. Is your testimony--Mr. Geithner sort of
implied. He scares Members of Congress. He scares the public.
We are all scared. He said, ``If AIG was not bailed out, this
country would have collapsed.'' He intimated our Constitution
would not have been able to be enforced. There would be a
revolution in this country.
Do you think it is at that extreme if we let AIG go
bankrupt, we would have had that kind of collapse and
revolutionary spirit in this country? Is that what your
position is today?
Mr. Paulson. I certainly have never said that, but what I--
--
Mr. Stearns. He implied that.
Mr. Paulson. What I have said is I believe we would have
had absolute economic disaster.
Chairman Towns. The gentleman's time is expired.
I will now recognize the gentleman from Ohio, Mr. Kucinich.
Mr. Kucinich. Thank you, Mr. Chairman.
Secretary Paulson, thank you for being here today.
In your testimony, you state that in your capacity as U.S.
Treasury Secretary, you were not involved in any decisions with
respect to payments to AIG's counterparties and that you were
not involved in any of the decisions concerning AIG's
disclosure of those payments.
I would like to accept that at face value, Mr. Paulson,
except the critical decisions concerning payments to
counterparties were made after the passage of the Emergency
Economic Recovery Act by Congress at your request, and the
Emergency Economic Recovery Act made the Treasury Secretary
responsible for the use of funds authorized by Congress.
Negotiations on the counterparty payments by the Federal
Reserve Bank of New York did not begin until November 6, 2008,
and the funding of the payment of the counterclaims was backed
by funds made available under the Emergency Economic Recovery
Act.
So Mr. Paulson, doesn't it make it your responsibility to
know how those funds were used?
Mr. Paulson. I think you will find, Congressman, and I
think SIGTARP reported this, that the TARP investment, the $40
billion TARP investment, was equity, and that those funds did
not go into this Maiden Lane vehicle where the Fed loan----
Mr. Kucinich. So you didn't have any knowledge of the
counterparty payment transactions?
Mr. Paulson. I did not.
Mr. Kucinich. Are you telling us that?
Mr. Paulson. I did not.
Mr. Kucinich. And are you telling us that you were not
aware of any of the discussions leading to the counterparty
payments with any of the principals?
Mr. Paulson. That is what I am telling you.
Mr. Kucinich. And you are telling us that as Treasury
Secretary, you had no role whatsoever in the decision on
counterparty payments, that you didn't ask anyone any
questions, that you never expressed an opinion on the matter,
and you were completely unaware of the nature of proposed
transactions until it was consummated, and no one asked you any
questions about how these Emergency Economic Stabilization Act
or the Recovery Act funds would be used to stabilize AIG, the
one financial institution more than any other that was behind
the crisis. You just didn't know.
Mr. Paulson. Well, Congressman, we asked a lot of questions
about the $40 billion TARP equity investment. That was
something that was our job and it was our authority.
Mr. Kucinich. Did you ask about the counterparty payments?
Mr. Paulson. And as I said, the loan, that was a Fed
authority and they had the authority and the technical
expertise to handle that. And that was their job, and we were
consumed with other matters and had great confidence in them to
carry out their responsibilities very professionally and well.
Mr. Kucinich. Well, you know, Mr. Paulson, no one disputes
that you worked very hard throughout the crisis. It is well
known you were personally talking with senior executives at all
major financial institutions on your now legendary cell phone,
which I might add is in the Museum of American History.
But how is it that you played no role in the handling of
this AIG relief? That you didn't have an interest in it? How is
it that despite Goldman Sachs' extensive role as a counterparty
to an agent for AIG in transaction, your extensive personal
network of associations within Goldman, which extended to
several Goldman alumni on staff at Treasury, that you can say
that you didn't have any knowledge, and by implication, no
influence over the transaction? I don't understand that.
Mr. Paulson. Well, it can't be any clearer. I assumed that
Goldman Sachs--knew that Goldman Sachs and I assumed most other
major financial institutions were counterparties, but I had no
knowledge of what the individual claims were and my concern
here was not about counterparty claims when we rescued AIG. My
concern was about what was going to happen to the American
economy and the American people.
And again, you need to understand when we worked together,
Fed and Treasury, we had different authorities, different
responsibilities, and there was so much going on that we had a
lot to do, and they had the authority and responsibility for
dealing with the loan----
Mr. Kucinich. The thing that I have trouble with, though,
is that the government gave Goldman Sachs, your former firm, a
better deal than it had a right to expect. You heard the
previous testimony here. It is mystifying how you, as Treasury
Secretary, this could happen and you not really know anything
about it unless you recused yourself from any discussions about
AIG, or about Goldman Sachs.
Mr. Paulson. I didn't have to recuse myself because the
fact was no one discussed it with me, consulted with me. I was
involved in other matters. This was a Federal Reserve authority
and they had the technical expertise and that was their job.
Mr. Kucinich. Thank you, Mr. Paulson. Thank you.
Chairman Towns. The time of the gentleman has expired.
Just so you know, we have four votes. At this time, I would
ask if anyone has not [remarks off mic].
No, I am saying we have votes on the floor, and of course
we have four votes and that we, due to previous agreement with
Mr. Paulson, we are now going to allow him to go.
Mr. Issa. Mr. Chairman.
Chairman Towns. Yes?
Mr. Issa. Could we ask if Mr. Paulson could stay just for 5
more minutes to complete on our side? Two people will split
time.
Chairman Towns. Two? Well, let me put it this way, then.
Who all has not had an opportunity? One, two, three.
Mr. Paulson, could you give us another 7 minutes, and let
me split 3\1/2\ and 3\1/2\?
Mr. Paulson. Yes. OK. We can work it.
Ms. Watson. Mr. Chairman, I would be willing to put mine in
writing to Secretary Paulson if he would be willing to respond
within a certain given time.
Chairman Towns. Mr. Secretary? Yes.
Mr. Secretary, there is a request in terms of if we give
the questions to you in writing, you will respond.
Mr. Paulson. Yes, we will get back to you.
Chairman Towns. Thank you very much. OK, yes.
Mr. Burton. Mr. Paulson, you were----
Chairman Towns. Let's see how we are going to break this
down first.
Mr. Burton. You were one of the chief operating officers in
Goldman.
Chairman Towns. Will the gentleman yield?
You are going to give us an additional 7, 8 minutes?
Mr. Paulson. Is it? OK.
Chairman Towns. OK. Good. All right, so we will break it
down four. OK.
Mr. Paulson. It really will be 8 minutes, right?
Chairman Towns. Right; 8 minutes.
Mr. Burton. You were one of the top officers for Goldman
Sachs, right?
Mr. Paulson. Yes, the top officer.
Mr. Burton. And some of the people that work for Goldman
Sachs went to work for Mr. Geithner?
Mr. Paulson. I believe I know----
Mr. Burton. Yes. And when you left Goldman Sachs and went
to the Treasury, you were there 3 years and you got $200
million in tax benefits because you didn't have to pay capital
gains on $500 million worth of stock. Right?
Mr. Paulson. I would strongly disagree with that because--
--
Mr. Burton. Well, that is what has been reported.
Mr. Paulson. Let me just----
Mr. Burton. Well, it is OK. You can respond. I will send a
question to you in writing.
Mr. Paulson. OK.
Mr. Burton. The concern I have is the same concern Mr.
Stearns has. You came before our Caucus very nervous, saying,
oh, my gosh, the sky is falling. We have to come up with this
money very, very quickly. You actually were visibly nervous
when you came before our Caucus. And then we have this bailout
of AIG, and you don't know anything about it. Mr. Geithner had
nothing to do with it.
It just really boggles the mind that some of the biggest
people involved in this whole thing from beginning to end had
nothing to do with it. They didn't know. It makes you want to
think that some clerk someplace was making these decisions. I
don't think anybody is going to buy that.
You and Mr. Geithner and others were directly involved in
making this decision, were you not?
Mr. Paulson. Of course we were directly involved, and I
said it in my testimony. I heard Mr. Geithner's testimony. I
heard him say the same thing. I was very supportive of that
decision to prevent the failure of AIG.
Chairman Towns. The gentleman's time has expired. I yield
to the gentleman--who is next on my side? Mr. Lynch.
Mr. Lynch. Thank you, Mr. Chairman.
Chairman Towns. Two minutes.
Mr. Lynch. Right.
Mr. Secretary, I need to make this happen in 2 minutes. You
were centrally involved with the negotiations regarding Bear
Stearns when you insisted on a very, very low price on the part
of the Bear Stearns shareholders in order to protect the
taxpayer. It has been reported that you were very supportive of
a $2 a share price in order to protect the taxpayers' interest.
And yet in this situation with AIG, and you were the CEO of
Goldman Sachs back in 2006. There was a longstanding
relationship there between AIG and Goldman Sachs that you were
well aware of. Goldman Sachs was a major counterparty on a lot
of these credit default swaps with AIG when you were the CEO at
Goldman, and that relationship continued after you left.
You would have known that these people were--that Goldman
was exposed here with these credit default swaps when the money
went from the taxpayer to AIG and through to your former
company.
And I guess the question that everybody has here is why,
when you insisted on Bear Stearns taking a big haircut, why did
you allow Goldman to be reimbursed, your former company, at 100
cents on a dollar in that situation? Why did you not weigh in
on behalf of the taxpayer?
Mr. Paulson. As I have said on a number of occasions, I did
not know. I had no knowledge of the size of the claim of any
bank and I had no involvement in a decision to make payments to
the counterparties. None whatsoever. I was very supportive of
the rescue of AIG because a failure of that company would have
been disastrous.
Mr. Lynch. Especially to Goldman Sachs.
Chairman Towns. The gentleman's time has expired.
Mr. Lynch. It would have been disastrous to the American
people.
Chairman Towns. The gentleman's time has expired. And I
yield 2 minutes to the gentleman from Ohio, Mr. Jordan.
Mr. Jordan. Thank you, Mr. Chairman.
Mr. Paulson, I want to clarify the chain of events
surrounding the original request for the TARP dollars, original
request to Congress. You came to the Congress, everyone on this
committee, I think everyone in Congress, would admit you came
to us in September and said, we need the money to buy troubled
assets, toxic assets.
As everyone knows, at some point you changed your mind.
When did you change your mind and decide you weren't going to
purchase the troubled assets, you were going to inject capital
into the banks? When did that happen?
Mr. Paulson. I changed my mind. I came to Congress on
September 18th.
Mr. Jordan. Congress first voted it down. October 3rd, we
voted for it. When did you change your mind?
Mr. Paulson. It was our strategy when I came to Congress to
buy illiquid assets, purchase illiquid assets.
Mr. Jordan. When? We have 2 minutes. When did you change
your mind?
Mr. Paulson. Two weeks went on, and it was by the time----
Mr. Jordan. Before the vote on October 3rd or after the
vote? When did you change your mind?
Mr. Paulson. I had begun considering putting capital into
the banks as one option as we got near the final vote, but I
had not changed my mind yet on the strategy. And I will say one
other thing to you, right up even after we put capital in the
banks, which we were forced to do by changing circumstances----
Mr. Jordan. Did you change your mind before the vote or
after the vote, because we have the interchange----
Mr. Paulson. I changed my mind after the vote because I did
not change--could I just say this? I did not change my mind on
purchasing illiquid assets until mid to late October after we
put the capital in.
Mr. Jordan. Just so I am clear, you are saying you didn't
change your mind until after the vote. I want to point to this,
the book, David Wessel's book that came out, In The Fed We
Trust, page 226, 227, and you have just been given a copy of
what it says. The House of Representatives rejected the Bush
administration's bank rescue plan on the 29th of 2008. The next
morning, Mr. Paulson ran into Michele Davis, the spokeswoman
and policy coordinator in the Treasury Building. ``I think we
are going to have to put equity in the banks,'' he said,
despite what Paulson had told Congress, buying toxic assets was
going to take too long. Davis gave him a blank stare, ``we
haven't even gotten the bill through Congress,'' she remembered
thinking. ``How are we going to explain this?'' she told her
boss. ``We can't say that now.'' He took the advice.
So again, I am asking you, was it before or after, because
you have said two different things. You said I started thinking
about it, but you said I didn't make the decision until after,
but you sold the Congress on the simple fact that you were
going to buy the troubled assets. That is why they needed the
money.
Mr. Paulson. If you would let me----
Mr. Jordan. And your spokesman directly contradicts that.
Mr. Paulson. Congressman, let me answer the question. Give
me a minute to answer the question.
During that period, when Congress was acting, the situation
worsened considerably. As we got near the final vote, it was
beginning to be clear to me that we were going to need to think
through other options. But long after, even after we put
capital in the banks, OK, even after----
Mr. Jordan. Did you express that concern to the Congress?
Chairman Towns. The gentleman's time has expired.
Mr. Paulson. Let me finish it. Even after we put capital in
the banks, it was still my intent to proceed with an illiquid
asset purchase program until we got into late October.
Mr. Jordan. Let me ask you one question.
Chairman Towns. I am sorry, the gentleman's time is
expired.
I now yield 2 minutes to the gentleman from Maryland, Mr.
Van Hollen.
Mr. Van Hollen. Thank you, Mr. Chairman.
Thank you, Mr. Paulson, and I accept your testimony that
failure to act and to enact a financial rescue plan would have
led to, as you said, economic disaster.
When you and President Bush came before the Congress in an
emergency, you submitted a plan that did not include at the
time a mechanism to make sure that the taxpayer would recoup
any dollars that had been extended to the financial sector.
The Congress at that time inserted a provision requiring
the President, whoever that President may be, to submit a plan
to recover those funds on behalf of the taxpayer. President
Obama has now done that in proposing a fee.
And my question to you is, do you agree that, given
everything that taxpayer did to save the financial industry,
that in addition to taking measures to prevent this from
happening in the future, we should also make sure that we put
in place a mechanism to recover the moneys that went to Wall
Street and other financial banks as part of the rescue?
Mr. Paulson. I do agree with that, but the provision that
was put into the TARP legislation envisioned, contemplated
looking at a 5-year window, and at the end of the 5-year time
period, if the taxpayer hadn't recovered the money, then there
was going to be a tax.
Now, today, as I look at the circumstance, the money is
going to come back from the banks, in my judgment, with a
profit to the taxpayer. And it is too early to tell about to
what extent the money is going to come back from the rest of
the program. I frankly think that the taxpayers will end up
being pleasantly surprised and much more will come back.
So my only question about the tax that is being suggested
is, is it too soon to make that judgment, No. 1. But most
importantly, I don't want that to take our focus off of dealing
with what is the real problem. We better fix this system so it
doesn't happen again.
Mr. Van Hollen. But would you agree there should be a
mechanism in place to ensure that at the end of the day, the
taxpayer recoups 100 percent of the TARP moneys?
Mr. Paulson. Yes, that was the intent of Congress and I
think that is the right thing to do. I agree.
Mr. Van Hollen. Thank you. Thank you, Mr. Paulson.
Ms. Norton [presiding]. Thank you, Mr. Paulson.
Mr. Paulson. Madam Congresswoman.
Ms. Norton. Yes?
Mr. Paulson. I had agreed to stay for another 8 minutes. It
has been 10 minutes.
Ms. Norton. For that reason, I dismiss the gentleman who
had the time to tell him his time had passed, and for the
committee, and especially for Chairman Towns, may I thank you
for not only 8 minutes, but 10 minutes.
Mr. Paulson. Thank you. Thank you. [Laughter.]
Ms. Norton. We would like to call the third panel.
Our final witnesses for today's hearing are Neil Barofsky,
the Special Inspector General for TARP; Thomas Baxter, who is
general counsel and executive vice president of the Federal
Reserve Bank of New York; Elias Habayeb, the former chief
financial officer of the Financial Services Group of AIG; and
Stephen Friedman, the former chairman of the Board of Directors
of the Federal Reserve Bank of New York, and current member of
the Board of Directors of Goldman Sachs.
May I ask the witnesses to stand while I administer the
oath?
[Witnesses sworn.]
Ms. Norton. Let the record reflect that the witnesses have
answered I the affirmative. You may now be seated.
I will ask the witnesses to summarize their testimony in 5
minutes. The yellow light means you have a minute left. The red
light means stop.
And then, of course, we will have time for questions from
Members.
All the witnesses have opening statements, so I believe
that given the four votes, that Members will be back by the
time your statements are done, for questions. I thank you.
Mr. Barofsky, would you present your testimony first?
STATEMENTS OF NEIL M. BAROFSKY, SPECIAL INSPECTOR GENERAL FOR
THE TROUBLED ASSET RELIEF PROGRAM; THOMAS BAXTER, GENERAL
COUNSEL AND EXECUTIVE VICE PRESIDENT, FEDERAL RESERVE BANK OF
NEW YORK; ELIAS HABAYEB, FORMER SENIOR VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER, FINANCIAL SERVICES DIVISION, AMERICAN
INTERNATIONAL GROUP, INC.; STEPHEN FRIEDMAN, FORMER CHAIRMAN,
FEDERAL RESERVE BANK OF NEW YORK
STATEMENT OF NEIL M. BAROFSKY
Mr. Barofsky. Thank you, Madam Chair.
It is an honor to once again be back testifying before this
committee. I would like to thank this committee for the support
it has shown our office, as well as its leadership and tenacity
in bringing about transparency to the AIG bailout generally,
and in particular to the counterparty payments.
This past November we issued our audit, an audit that was
requested by Representative Cummings and 26 other Members of
Congress, including members of this committee, reporting on the
decisionmaking process that led to then-President Geithner and
the Federal Reserve making the decision, the choice to pay 100
cents on the dollar, effectively par value, for a series of
securities that at the time were worth less than half of that
amount.
And as we demonstrate in the audit, that was in fact a
choice, a series of policy choices that were made that limited
the ability of the Federal Reserve in its negotiations, and a
choice to conduct the negotiations in the way that they did.
And in our audit and in our testimony, we lay out the
different justifications and explanations given by the Federal
Reserve, many of which Secretary Geithner repeated this
morning, and our responses, and in some cases our criticisms of
those policy decisions.
What I would like to focus on today, though, is expanding a
different theme in the audit, and that is looking at the tone
and the amount of effort that went into those negotiations,
even assuming all those policy decisions which restricted the
latitude of the Federal Reserve.
How are those negotiations conducted? Well, essentially a
number of mid- and senior-level executives at the FRBNY reached
out to their counterpart at AIG's counterparties. They did this
basically over the telephone, and after informing them that
even the negotiations themselves were voluntary, they asked if
they would be willing to take a haircut on the amount of
concession. For seven of the eight, the answer was ``no.'' For
the eighth, UBS, the answer was ``yes'' so long as the other
counterparties also agreed to a similar concession.
The Federal Reserve at that point decided to shut down
negotiations; not to pursue that willingness to negotiate; and
decided with the approval of Secretary Geithner, to pay 100
cents on the dollar. Now, this stands in stark contrast to a
negotiation that occurred just a few weeks earlier. And this,
of course, was the negotiation by which the government
purchased $125 billion of preferred securities from the nine
largest institutions as part of the TARP's Capital Purchase
Program. There, unlike in AIG, it was the principals that were
involved: President Geithner, Secretary Paulson, and Chairman
Bernanke on behalf of the government. And on behalf of the
counterparties: the banks--some of the exact same banks that
were subject to the AIG discussions--and the chief executive
officers. There, unlike in AIG, the conversations weren't
conducted over the telephone. Each of those CEOs was summoned
to Washington and told to appear in a Treasury conference room,
gathered together. And there, unlike in AIG, the message was
forceful. President Geithner, Chairman Bernanke, Secretary
Paulson and others, made it very clear of the importance that
they believed that this negotiation was; how important it was
for the banks to agree. They used the terms like ``that it
would be good for the country for them to do so.''
No such similar effort was taken with respect to the AIG
negotiations, and the result of the Capital Purchase Program:
100 percent agreement. The result of the AIG, as we all know,
were failed negotiations.
Now, would it have made a difference if President Geithner
or Secretary Paulson got on the phone and talked to those chief
executive officers? Would it have resulted in the savings of
billions or tens of billions of dollars for the taxpayer? We
don't know. We can't know. But we do know, because we have
recently been informed by the French regulator, the same
regulator that the Federal Reserve cited their intransigence as
being one of the great barriers to achieving effective
negotiated haircuts, that recently told SIGTARP that in fact
they would have been willing to engage in just such a
negotiation, so long as it was at a very high level, so long as
it was completely transparent, and as long as it was universal
agreement, everyone came around the table.
And we also know that if such negotiations occurred and
were successful, they would have addressed all of the concerns
that Secretary Geithner addressed this morning, and many of the
concerns that are outlined in our audit of concerns by the
Federal Reserve. But we will never know because that effort was
simply not taken.
Madam Chair, our audit covers, I see my time is running
low, our audit obviously covers a lot of other issues, as does
our testimony, including some of the recent troubling comments
from Treasury that impact transparency, and of course, I will
be available to answer any questions that you or other Members
of the committee may have.
Thank you.
[The prepared statement of Mr. Barofsky follows:]
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Ms. Norton. Thank you, Mr. Barofsky.
Mr. Baxter, we would like you to go next.
STATEMENT OF THOMAS C. BAXTER
Mr. Baxter. Good afternoon, Madam Chairman Norton, Ranking
Member Issa, and other Members of this committee. Thank you for
inviting me to appear here today.
As the general counsel of the Federal Reserve Bank of New
York, I welcome the opportunity to talk about the Federal
Reserve's work to stabilize AIG at a critical point. I will
also address the role played by the Federal Reserve Bank of New
York in securities disclosures made by AIG.
Let me begin with just a few words about autumn 2008, when
our Nation was challenged by a financial crisis of a kind we
had not seen since the Great Depression. At the New York Fed,
we were literally working around the clock trying to implement
a number of liquidity programs directed toward market
stability.
Today, we consider some of the actions taken during those
frenetic times with respect to AIG. Everything we have done
since this crisis began has been with the goal of stabilizing
our financial system and assisting our economic recovery.
Turning to September 2008, and the actions taken by the New
York Fed, the Board of Governors of the Federal Reserve System,
and the Department of the Treasury, they were designed to avoid
the catastrophic systemic consequences that would have resulted
from an AIG bankruptcy. Every American would have been
adversely impacted. We did not lend to AIG because we wanted
to, but because we had to. A decision not to act might have
been easier on us, but it would have been worse for all.
Now, I will turn to the specific issues that bring me here
today. First, there have been concerns about AIG's
counterparties receiving large payments for terminating CDS
contracts and selling collateralized bid obligations. There
have been allegations that this was a backdoor bailout designed
by the Federal Reserve to assist the banks at the expense of
the American taxpayer.
These allegations are not true. AIG was scheduled to
announce an earnings loss of nearly $25 billion on November 10,
2008. Had we not reached agreement with the counterparties to
terminate their credit default swap contracts by that date by
acquiring the CDOs, AIG would have been downgraded by the
credit rating agencies and thrown once again to the brink of
bankruptcy. This would have returned us to the situation we
faced in September and required even further government
support. We took the action needed to terminate the CDS
contracts by the deadline, and our focus was on solving the AIG
liquidity problem, not on benefiting AIG's counterparties.
Second, I would like to clarify the misunderstanding that
the Federal Reserve and Treasury Department received nothing of
value in exchange for the payments to AIG's counterparties. As
part of the termination deal, the Federal Reserve, through its
special purpose vehicle, Maiden Lane III, paid approximately
$29 billion and received assets with a fair market value of $29
billion. The par value of the assets was approximately $62
billion. Today, the value of the assets which secure the
Federal Reserve's loan exceeds our loan balance by several
billion dollars.
Third, concerns have been expressed about our involvement
in AIG's securities disclosures. In particular, there have been
allegations that we somehow tried to engage in a cover-up by
recommending that AIG strike certain sentences in its SEC
disclosures related to the payments to the counterparties.
These allegations are not true. Our sole purpose was to ensure
that securities law disclosures by AIG were accurate and
appropriately protective of taxpayer interests.
Let me finish by thanking the committee for holding this
hearing. We submitted an extensive statement yesterday and we
have delivered 250,000 pages of documents to you. I believe
that upon careful examination, the committee will see that our
actions successfully addressed a potentially calamitous risk to
the economy, and in doing so, protected the interests of the
American people.
[The prepared statement of Mr. Baxter follows:]
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Ms. Norton. Thank you, Mr. Baxter.
Mr. Habayeb, we are ready for your testimony.
STATEMENT OF ELIAS HABAYEB
Mr. Habayeb. Madam Chairman, Ranking Member Issa, Members
of the committee, thank you for the invitation to appear before
you today.
From September 2005 until May of last year, I was senior
vice president and chief financial officer of the Financial
Services Division at American International Group. I left AIG
in May 2009 on excellent terms and continue to provide advisory
services to the company while I plan the next phase of my
career.
By way of additional background, I am a licensed CPA and
practiced with Deloitte and Touche, becoming a partner in 2003.
My position with AIG gave me some insights into Maiden Lane
III. Maiden Lane III, LLC, is a financing entity created by the
Federal Reserve Bank of New York. The entity helped facilitate
the unwinding of a significant portion of AIG financial
products' credit default swaps by purchasing the underlying
multi-sector CDO bonds from F.P. swap counterparties. At the
same time, the related swaps were terminated.
I understand that the committee is interested in learning
more about these transactions. These transactions were critical
to AIG. They significantly reduced the risk of substantial
collateral postings to counterparties that F.P. was required to
make under the swaps. They also reduced the erosion to AIG's
capital from mounting mark-to-market losses on the swaps.
A little history is helpful. During the subprime mortgage
crisis, the bonds underlying F.P. swaps began to decrease in
value. As a result, beginning in late 2007 through 2008, F.P.
reported billions of dollars of mark-to-market losses on the
swaps under the fair value accounting rules. F.P. also posted
billions of dollars in collateral to its swap counterparties as
a result of the declining market value of the bonds and
declines in AIG's and the referenced bonds' credit ratings.
AIG lacked the financial resources to come up with a large-
scale solution. Because AIG is not a bank, it did not have
access to funding through the Federal Reserve in the normal
course. Instead, AIG had to rely on the capital markets.
By the beginning of September 2008, the collateral postings
and the mark-to-market losses, along with other factors, were
straining AIG's liquidity, but AIG was not able to access the
capital markets. On September 15, 2008, the rating agencies
downgraded AIG, triggering an onslaught of new collateral
calls.
Even after the Federal rescue on September 16, 2008, AIG
still needed to reduce its exposure to the mark-to-market
losses and collateral calls on F.P. swaps. The Federal rescue
did not stop these losses or payment obligations. This is what
led to the creation of Maiden Lane III.
Under the terms negotiated by the New York Fed with the
swap counterparties, Maiden Lane III bought the underlying
bonds at the then-market value. Specifically, Maiden Lane III
purchased approximately $62 billion notional amount of bonds
underlying F.P. swaps for a market value of $29 billion.
Separately, F.P. agreed to terminate the swaps for an amount
equal to the difference of the bonds' notional par value and
its market value. The collateral that F.P. had posted to date
was used to pay the cost of terminating the swaps.
Specifically, F.P. paid the counterparties approximately $33
billion in previously-posted collateral to tear up the swaps.
So the counterparties ended up with par, a total of
approximately $62 billion.
To conclude, Maiden Lane III was critical in mitigating
AIG's continued exposure to the significant mark-to-market
losses and collateral calls on the swaps that was draining
AIG's capital and liquidity.
I am happy to answer any questions the Members of the
committee may have.
Thank you.
[The prepared statement of Mr. Habayeb follows:]
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Ms. Norton. Thank you very much, Mr. Habayeb.
Mr. Friedman.
STATEMENT OF STEPHEN FRIEDMAN
Mr. Friedman [Remarks off mic]. As indicated in my prepared
statement, I have little factual information to offer in
response to the questions set forth in the committee's
invitation for me to testify. The explanation for my lack of
involvement in the New York Reserve Bank AIG counterparty
transactions requires an appreciation of the limited role that
a Reserve Bank's chairman and Board of Directors play in a
Reserve Bank's operation.
A Reserve Bank's Board of Directors is really more akin to
an advisory board. It is actually sort of a hybrid, more akin
to that than it is to the Board of Directors of a typical
corporation. Reserve Bank Directors serve part-time, make
observations on the economy and markets, make recommendations
on monetary policy, and approve the bank's budget, internal
controls and policies and procedures, and personnel matters.
But consistent with the structure created by the Federal
Reserve Act, the Directors of the 12 Federal Reserve Banks have
no role in the regulation, supervision, or oversight of banks,
bank holding companies or other financial institutions. Such
responsibilities, including the extraordinary financial
interventions of 2008, are instead carried out by the officers
of the 12 regional Federal Reserve Banks acting at the
direction and with the oversight of the Board of Governors of
the Federal Reserve System in Washington. In other words, the
Board of Governors in Washington effectively is the Board of
Directors for Reserve Bank undertakings such as the AIG
financial rescue transactions.
Accordingly, as I explained to committee staff and
consistent with the Fed's ground rules, whether as chairman of
the New York Federal Reserve Board or otherwise, I was not
involved in the decision to bail out AIG, the decision to repay
the AIG counterparties at par, or the decision not to publicly
disclose those counterparties' names. I did not ratify those
decisions and I do not know just who made those decisions.
I am advised that on the evening of November 9, 2008, the
Chair of the bank's Audit Committee and I received a telephonic
summary briefing from bank officials about the transaction. At
that point, the deal had been signed up and was to be announced
by the Board of Governors the next morning.
Finally, I would note that by statutory design, the Boards
of the Reserve Banks are comprised of members with
intentionally diverse financial interests and affiliations,
such that the Directors' recommendations and advice on monetary
policy include input from a diverse array of bankers,
borrowers, and community leaders.
Because the Boards, once again by statutory design, include
bank executives and bank shareholders, many current Directors
would have conflicts of interest if the Reserve Bank Boards of
Directors also had any authority over, or any role in,
individual supervisory matters like the New York Reserve Bank's
rescue of AIG and the AIG counterparty transactions. But the
New York Reserve Board does not have such authority, and it and
I were walled off from these matters--really ring-fenced.
I stand ready to answer any questions the committee may
have.
[The prepared statement of Mr. Friedman follows:]
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Ms. Norton. Thank you, Mr. Friedman.
Let's begin with Mr. Baxter.
Mr. Baxter, the committee notes that you have said publicly
on a number of occasions that AIG, and not the Federal Reserve
of New York, had the final say on disclosures. The committee
has, however, in its possession an email, I believe it is up
there on the display, that was obtained by subpoena. It
involves a senior person in your office, and the words said
are, ``any public disclosure by AIG was still subject to FRS
approval,'' Federal Reserve Service approval. That sounds
pretty much like the Federal Reserve has the final approval
with that kind of statement.
If what you say about AIG having the final decision is
true, why did a top New York Fed employee say that the final
approval, in effect, rests with the Federal Reserve?
Mr. Baxter. Madam Chairman, as I look at that email, I
don't see it being addressed to me. So I will have to speculate
as to why the author of that email----
Ms. Norton. Who do you think it was addressed to, Mr.
Baxter? You know, you don't just send emails in the air.
Mr. Baxter. I can't read it well enough, Madam Chair, to
tell you, but it doesn't look like it is addressed to me. Madam
Chair, I am willing to speculate, though.
Ms. Norton. Well, since you raised the issue of who it is
from, Steven Massari to Sarah Dahlgren. It is your top people.
Your proxies speak for you, do they not?
Mr. Baxter. They are not only very, very senior people.
They are also very diligent people. And with respect to the
email, Madam Chair, it doesn't refer to securities disclosure.
It refers to a public disclosure by AIG, so I would point that
out as one item.
With respect to AIG's securities disclosures, those are
AIG's legal obligations under our securities laws, given that
AIG was then and is now a publicly traded company. So in the
first instance, AIG has a responsibility to comply with our
securities laws. And that is the starting point.
Now, it is true that AIG shared its securities law
disclosures with the Fed. And it is true that the Fed commented
on those draft securities law disclosures of AIG. Our purpose
in making those comments was twofold: first, to assure
accuracy; and second, to protect the taxpayer interest. But at
no point, Madam Chair, did we ever interfere with a mandatory
obligation of AIG to report to the SEC in a securities filing.
It was always for the two interests that I mentioned, the
interest of accuracy and the interest of protecting the
taxpayer interest that we commented on AIG's public
disclosures.
Now, it could not----
Ms. Norton. Board approval is a very troubling word here.
It implies what it says.
Mr. Baxter. It is, Madam Chair, and it could not be for an
AIG public filing and approval because that legal obligation
with respect to AIG's securities filings as a public company is
AIG's. It cannot be delegated to someone else.
Ms. Norton. Agreed.
Mr. Baxter. Not even someone at the----
Ms. Norton. Agreed, but it looks, though, it looks as
though a very powerful agency was saying otherwise. I agree
with what you say, but that is not what the email said. Perhaps
you can see why it makes it look as though the Federal Reserve
of New York is not being up front with the American people here
behind the scenes where these emails that put the Federal
Reserve in a position that you yourself indicated is not a
position it can have under law.
Mr. Baxter. Correct.
Ms. Norton. Mr. Barofsky, perhaps you can help me. I am
sitting here listening to this testimony and I still cannot
understand. I need to understand, for a moment put yourself in
the position of the parties, why you think AIG's counterparties
were paid 100 cents on the dollar?
Mr. Barofsky. Well, I think that, you know, it is hard to
put myself into the shoes of either the counterparties or the
Federal Reserve, but my understanding of the discussions, I
certainly understand why the counterparties wanted to be paid
100 cents on the dollar.
Ms. Norton. Of course, but why would the government want to
do that? I mean, you cannot assume in a situation like this
that somebody wants to do evil or to cheat the taxpayers. We
are trying to find, get beneath the appearance, trying to place
ourselves at the table with the parties, including the
government, including the Federal Reserve, including AIG.
So you yourself in your testimony lay out what had just
occurred. Why would that procedure not be used?
Mr. Barofsky. I cannot give you an answer to that question.
I think that if that effort and that tone were there, Mr.
Baxter could answer that question. Probably Secretary Geithner
could best answer that question.
Ms. Norton. Well, I mean, again, if you have to assume the
best and not the worst, then what would be the best reason for
not using the Government's bargaining power?
Mr. Barofsky. I really cannot imagine. I think that, again,
accepting the policy limitations that they imposed upon
themselves--and we don't accept them necessarily in the audit--
but even accepting them, it seems to me that taking the
effort--apparently, Secretary Geithner at the time was
frequently speaking to the CEOs of many of these
counterparties. It seems that just putting a little extra
effort in trying to communicate the importance of this. I mean,
negotiations were ongoing. It is not as if, as somebody may
think, that they made no effort in negotiations. There was some
effort negotiating.
Ms. Norton. So there was effort, so, you know, when you say
that they said, ``would you accept 100 cents on the dollar,
less than 100 cents on the dollar,'' why, anybody would answer
``no'' to that question.
Mr. Barofsky. The surprising thing is that one of them did
answer ``yes,'' and that wasn't----
Ms. Norton. And why do you think he answered ``yes'' and
the others answered ``no?''
Mr. Barofsky. I think they were willing to negotiate
because I think that, you know, if you look at it from----
Ms. Norton. Did he know the others had answered ``no?''
Mr. Barofsky. Well, he said ``yes'' only as long as all the
others would say yes. So his idea was that we would do----
Ms. Norton. Well, why didn't he stick with the others? I
mean, there must have been some--Mr. Baxter?--why would--you
know, if you see that there is solidarity here and maybe you
can get the government where you want it, why would one person
say yes? He must have known something. He must have felt
something for the country? Did he feel something for the
economy that made him do it? Is he a patriot and the others
not?
Mr. Barofsky. I think that there was, you know, this was
UBS, and I think there probably was a recognition that the
Federal Reserve had done so much for the global economy, and
the American taxpayer--putting the American taxpayer who had
literally taken the entire global economy on its back and was
supporting not just the U.S. institutions, but the global
systemic risk that the sacrifices the taxpayer had made.
And that, I think, is a powerful argument in the context of
negotiations if it is made clear how important it was to the
American decisionmakers, to the principals. And I think that
perhaps, I don't want to crawl into the mind of the UBS, but
there was a willingness to engage in these discussions, but as
long as all the others. And because seven of the eight had said
no, the Federal Reserve essentially shut down those
negotiations.
But I think it is a very fair question to say why not do
something similar to what was done just a couple weeks before
in Washington with respect to the Capital Purchase Program,
which is, again, those were not compelled transactions, it was
ultimately a voluntary transaction, but the negotiations, if
you will, were conducted in a very, very forceful manner that
made it very clear that this was an issue of national
importance.
Ms. Norton. So I would ask you the same question, Mr.
Baxter. One of the reasons I feel so angry at the banks and at
the government is that this is a commonsense question that
anybody would ask without being very learned or very practiced
in negotiations. So could you give us your answer?
Mr. Baxter. And I think, Madam Chair, this is a key
question. The key question is, why didn't the Federal Reserve
act successfully to get a concession of perhaps----
Ms. Norton. Is your mic on, sir?
Mr. Baxter. I think it is.
Why weren't we successful in getting a concession from the
counterparties? Why wasn't AIG successful in getting a
concession from the counterparties, because that was the
situation? And it is related to bargaining power.
Now, typically when a debtor is trying to restructure a
debt with a creditor, the bargaining power that the debtor
gets, Madam Chair, is from the threat of bankruptcy. This
negotiation with the counterparties was taking place in the
fourth week of November 2008. So how would the threat of
bankruptcy have played during that particular period of time?
And of course, Madam Chair, you know that the Federal Reserve
had already interceded to save AIG from bankruptcy on September
16, 2008, only 6 weeks before.
So what about the bankruptcy threat? And I have three
responses. First, that threat was not credible, given the
actions of September 2008. Second, that threat of bankruptcy
was not true. We were not prepared to put AIG into bankruptcy
in November 2008, and we don't misrepresent situations in
negotiations at the Federal Reserve.
Ms. Norton. But the threat was there. Excuse me. The
difficulty and the bargaining positions were there. So I still
don't understand why ask a simple question didn't proceed, with
business as usual, as if you weren't holding that threat card.
Mr. Baxter. And I am trying to explain exactly why we had
no bargaining power with respect to the bankruptcy risk. The
first is it wasn't credible. The second is it wasn't true and
it would have been unethical for us to suggest otherwise. And
the third is it would have been counterproductive because the
biggest threat we were facing at that point was the threat of
the credit rating agencies downgrading.
Ms. Norton. Mr. Baxter, I understand that nuclear bomb
threats are not credible. And I can understand your argument as
to the insolvency.
Mr. Barofsky, now, it is true that when you comment and you
tell somebody, you know, you are going to kill them, and you
know for sure that you are not, and they know for sure you are
not. Then the question becomes, what is the next step after the
nuclear bomb threat?
Mr. Barofsky. I think there are two things. First of all,
what I was suggesting, that the principals got involved in
negotiation. I wasn't suggesting that they threaten bankruptcy.
My comparison to what happened a couple of weeks earlier was,
again, presuming all the restrictions that Mr. Baxter and
Secretary Geithner had put on themselves, including not wanting
to threaten bankruptcy. So first of all, I think that what I
was, when drawing this comparison, I wasn't suggesting that
they do.
As to the complete absence of leverage, again, I think you
have to look at this in the context of what the situation was,
what the position of U.S. Government officials explaining how
important this was, much like they had 2 weeks earlier. And I
don't think that they needed to threaten bankruptcy.
However, as Secretary Geithner noted this morning, there
was a very serious concern at the Federal Reserve and in the
markets that there was going to be a downgrade of AIG, a
downgrade that Secretary Geithner and the Federal Reserve have
indicated to us, would have resulted in AIG going into
bankruptcy despite the best efforts of the Federal Reserve.
There is a limit on how much money, perhaps, the Federal
Reserve was willing to print at some point if bankruptcy was
triggered.
And I think that, again, without threatening bankruptcy, I
think that if there was a negotiation, if everyone was in the
room, the Federal Reserve could point to the fact that there is
a possibility of a downgrade. They could point to what the
market was treating AIG's debt at the time. The credit default
swaps were through the roof. There was fear in the market that
AIG would default. And again, without threatening the
bankruptcy, could point out the fact that if there was not a
resolution, if they didn't agree to a haircut, it may be
difficult for the Federal Reserve to get Board approval, for
example, to pay 100 cents on the dollar. They had not yet
received that approval.
What I am saying is that there is a whole different range
of options in that negotiation that could have occurred had
they simply brought everyone in the same room and if it was
made a priority, if there was a level of effort across the
board.
I can't tell you if it would have worked. I have no idea if
it would have worked.
Ms. Norton. Well, have you ever heard 100 cents on the
dollar being given in the kind of situation like this? Isn't
that rare as a way to come forward when you see a desperate
situation on the other side? Surely, some gradations down from
that were in order.
And I guess I should ask Mr. Baxter. The puzzling thing is
to come up with 100 cents on the dollar without proceeding
through some other process until you maybe had to get there. We
don't see, the committee does not see how you--and is bothered
by the spontaneous nature of the acceptance of the notion that
the government had to pay 100 cents on the dollar. We have
hardly heard of a negotiation in our lifetime when that is what
two unequal parties at the table end up doing, no concession,
100 cents on the dollar.
So perhaps you can tell us why what Mr. Barofsky says at
least some sense, yes, of course, you are not going to put them
into bankruptcy. We do not question nearly as much the bottom
line here as we question how you got to that bottom line.
Mr. Baxter. Well, because we couldn't use the threat of
bankruptcy, Madam Chair, one question was could we use our
regulatory or supervisory power? And we considered the answer
to that question ``no,'' because that would have been an abuse
of our power. And the reason we felt that is it wasn't using
the supervisory power with respect to an institution to get it
to do something to enhance its safety and soundness, for
example, like raise more capital.
If an institution doesn't do that, and it is appropriate if
the Fed believes there is insufficient capital to use a promise
or a threat perhaps of enforcement action to induce the
institution to take that action, that was not the case here.
Here, the suggestion is we use our regulatory power to cause a
counterparty to give up property in the form of a concession.
So it is not using the regulatory power for the purpose
intended by law. It is using the regulatory power as a promise
or a threat to extract money from someone. And that raises all
kinds of considerations that are not consistent with the rule
of law.
And just another point, Madam Chair.
Ms. Norton. You apparently didn't think you had to change
the regulatory power in order to deal with Bank of America.
Somehow you would have to go back, change the law in order to
deal with AIG.
Mr. Baxter. Well, Madam Chair, remember what happened when
we asked the two French banks, SocGen and Calyon, if they would
give a concession. Their first answer was no, and then they
were supported in that negative answer by the French Banking
Commission. So that happened with the two French banks.
You also asked earlier about UBS. Now, UBS said, ``we might
consider as much as a 2 percent concession, but only if
everyone does it, everyone else does that as well.'' And so
there was a fairly effective blocking action there by UBS.
Now, on the point that participating in the benefits of all
of the Federal Reserve's and the Treasury's action in combating
the financial crisis, with respect to UBS, Madam Chair,
remember UBS had already been rescued by Switzerland in the
financial crisis.
So again, in UBS, we are dealing with UBS. We asked them if
they would consider a concession. You know what their answer
is, but it is a hard case to make that they owed the United
States a favor when Switzerland had already come to their
rescue.
Ms. Norton. Thank you, Mr. Baxter.
I am going to move now, since I have had more than the
allotted time because it took you all so long to get back, I am
going to move to the ranking member.
Mr. Issa. I thank the chairwoman, and I certainly think
that this was a good case for your not necessarily wanting a
floor vote today.
Ms. Norton. But not tomorrow.
Mr. Issa. But not tomorrow.
Thank you, Madam Chair.
Mr. Baxter, I didn't know who you were after 30 years of
loyal service until a few days ago, so forgive me for maybe now
playing total catch-up. Your old boss, now-Secretary Geithner,
spoke glowingly about the staff and the hard work and the
people involved. But we now believe and understand that a staff
report was done within the Fed that said ``let AIG go
bankrupt,'' and that was never, ever brought before the Board.
In fact, Chairman Bernanke pulled it so it would not be
considered by the broader Board of Governors.
Are you familiar with that study or report?
Mr. Baxter. I am not.
Mr. Issa. You are not. So he kept it from a person who
was--these emails show you were at the center of all of this.
He kept from you his own staff's decision. Chairman Bernanke
did not trust his own Governors or even the New York Fed's
inner circle with a recommendation that said let them go
bankrupt.
Does that surprise you?
Mr. Baxter. First, ranking member, I am the general counsel
of the New York Fed. The chairman----
Mr. Issa. But all that question was in the New York Fed. It
was a study on behalf of the New York Fed.
Mr. Baxter. I don't know the study, and I am sorry I don't.
Mr. Issa. OK. Well, with any luck and with the indulgence
of the Chair, we will get discovery on that. As of right now,
all I have is a whistleblower and one Senator who confirmed
that it exists, but has said on CNBC that he can't release it,
even though he thinks it is damning.
Additionally, you are familiar with Schedule A of the
documents. OK. So this unredacted form shows 57773 and some
alpha numeric after that. It then shows that Deutsche Bank
would be the counterparty recipient, the breakdown. Basically,
these are sort of who owns the bonds, to put it in terms the
American people would understand.
Are you familiar with this document called Schedule A? It
was delivered from the Fed.
Mr. Baxter. This was Schedule A, the shortfall agreement?
Mr. Issa. Yes.
Mr. Baxter. Yes, I am familiar with that.
Mr. Issa. Are you familiar with the cover-up that AIG, with
the insistence of the Fed, clearly perpetrated by getting this
made confidential and not disclosed to the public until 2018,
that work continuing until may of this year, or last year?
Mr. Baxter. Congressman, there was no cover-up. I can
explain the processing of the Schedule A.
Mr. Issa. Well, if you can just briefly tell me the first
part, which is are you familiar with the work that went on to
seal this from being disclosed in public SEC filings at least
until 2018.
Mr. Baxter. I am familiar.
Mr. Issa. OK. And in a short way, do you think that is
right or wrong?
Mr. Baxter. I think all of the conduct was perfectly
appropriate.
Mr. Issa. OK. Well, I am going to leave that because
although I don't agree, ultimately I just wanted that answer
and we will see in time on other people.
Can you put up slide 23 please?
Can you please explain what happened following your receipt
of an email from Marshall Huebner? And did AIG ever make this
filing with the SEC?
Mr. Baxter. Would you like me to explain?
Mr. Issa. Please, as briefly as possible.
Mr. Baxter. This concerned a salary increase for the chief
financial officer of AIG, and Mr. Huebner was concerned about
that salary increase. I was also concerned about that salary
increase. And as a result of our collective concern, I had
conversations with AIG, and the chief financial officer in
question decided that he really did not want the salary
increase at this time. The salary increase was withdrawn.
Mr. Issa. OK. So by talking him out of it, it didn't have
to show up in public filings, so it was no harm, no foul in
this case?
Mr. Baxter. It had nothing to do with the public filing. It
had everything to do with we didn't think this was appropriate.
Mr. Issa. OK.
Mr. Baxter. The salary increase.
Mr. Issa. A last question for you, and then I want to
quickly go to the SIGTARP. Do you know of a compelling legal
authority that would have prevented AIG from going bankrupt? In
other words, did the Fed have the authority to let them go
bankrupt? Because Secretary Geithner has implied that he didn't
have any options and he didn't have the authority to do
anything but what he did.
That is pretty much ayes or no. Did you or anyone at the
New York Fed, to your knowledge, in fact do a study or come up
with a legal opinion that said you can't do anything else
except let them go bankrupt or do this, and you can't let them
go bankrupt?
Mr. Baxter. First, we were not the supervisor of AIG on
September 16, 2008, so we had no supervisory responsibility.
Mr. Issa. No, no, but my question is since Secretary
Geithner was there and said there was no other choice, your
boss made the call. Do you know of a legal opinion that he was
given or that exists today as to that?
Mr. Baxter. Well, I was his chief legal officer, and I
would say then what I say now, and that is we need a resolution
statute in this country to deal with institutions as
systemically significant as AIG. We didn't have that tool in
September 2008 and we still don't have that tool, Congressman.
Mr. Issa. OK.
Mr. Baxter. And we really need it.
Mr. Issa. But, you know, I am going to ask this for 2
minutes, quickly, to sort of counter the very long time, but I
will be very brief.
Mr. Issa. I thank the chairman.
Chairman Towns. [presiding]. I yield the gentleman 2
minutes.
Mr. Issa. Mr. Barofsky, your report directly contradicts so
much of what we are hearing from people that were there or are
there as to whether we will get paid back. Let me break it down
to just two questions, and then take the rest of the 2-minutes
for your answer.
One, is it true that we are just not going to get paid back
by anyone's reasonable estimation certain funds? And two, had
we used other means to underwrite AIG such as we will buy out
that at a discount or we don't buy them? We will guarantee or
give, or buy at discount, you decide whether you want our AAA
rating versus actually getting the transfer at a time when
these banks wanted a transfer?
If any of these other techniques that you are now aware of
that logically could have been used, would we be in as bad a
situation of not getting paid back as we are?
And then, please elaborate on what we are seeing of what we
are not going to get paid back that flies, and that doesn't
even include, by the way, the idea that the moneys come back
and it is being re-spent in other ways. But just as to your
knowledge, can you give us as much knowledge, as much time as
we do have to answer that?
Mr. Barofsky. Sure. Ranking Member, I just want to take the
chance that is in my initial testimony to thank you and the
chairman for your support of our organization and for the
leadership and the tenacity that the two of you and this
committee has shown in bringing transparency to the AIG
bailout. The Treasury's own calculation is when they did their
financial statement at the year-end, September 30, 2009,
projected a more than $30 billion loss on its AIG investment.
When you are looking at these counterparty payments, you
can't look at just one part of them. They were basically in two
chunks, if you will. There is the Federal Reserve loan to
Maiden Lane III, which purchases securities. This is about $29
billion. And the rest were counterparty payments, the balance
of about $33 billion that AIG had previously made. So there is
a total of about $62 billion.
Now, with the chunks that the Federal Reserve lent to
Maiden Lane III, that portion, which we have been hearing
about, how that is on track to be paid back and the taxpayer
may actually, and the Federal Reserve Bank of New York may
actually make a profit on that. I see no reason to think that
is not true. That may very well be accurate, that one piece of
it.
However, the other piece, and these really are two sides of
the same coin, and we have been critical of trying to separate
that out and only looking at the Federal Reserve piece and
saying, ``oh, because that is going to get paid back, it is a
profit,'' that other part is part of the projected $30 billion
loss.
So one of the reasons why we are so critical is that if you
just say, ``oh, on these transactions, where the Federal
Government, the taxpayer, is on track to be made whole,'' for
someone who is not as familiar with the intricacies of these
transactions as we all are, you would get the mis-impression
that the counterparty payments, the decision to pay 100 cents
on the dollar, is going to leave the taxpayer whole.
And by Treasury's own calculation, you can't separate that
$30 billion of anticipated loss from these transactions because
the money that AIG paid came from a loan from the Federal
Reserve, a separate loan that was then paid down with taxpayer
money through the TARP. So I think it is----
Mr. Issa. I am sorry, so I think it is very difficult and I
think it is inappropriate to separate those two out.
Thank you, Mr. Chairman.
Chairman Towns. I now yield 5 minutes to the gentleman from
Massachusetts.
Mr. Lynch. Thank you, Mr. Chairman.
I want to thank the witnesses for your willingness to help
the committee with its work.
Mr. Barofsky, we have been going back and forth with
Secretary Geithner and Secretary Paulson earlier today about
the decision to pay the derivatives, well, credit default swaps
that were entered into between AIG and Goldman Sachs and a
handful of other companies. The position of Secretary Geithner
is that he didn't have any other tools other than paying 100
percent of the value, 100 cents on the dollar, or allowing AIG
to go into default and bankruptcy. And at least the testimony
of Mr. Paulson is that he was not there, and I find that
mystifying.
But in your own impression and reviewing the record here,
was there any opportunity for Secretary Geithner, the Treasury,
the Fed, to negotiate a haircut with Goldman Sachs instead of
paying them at par value, and thereby saving the American
taxpayer possibly billions of dollars?
Mr. Barofsky. Yes, and I think that as the Federal Reserve
and the Secretary acknowledge, the whole plan that the hope
from the Federal Reserve was to attempt to negotiate a haircut.
So if there was an agreement among the parties to pay, to
accept less than par, that obviously wouldn't have violated any
of the policy concerns that have been described. And I think
very much these negotiations could have been conducted in a
different way, a more forceful way.
The comparison that you cited to Secretary Geithner earlier
and which is discussed in our testimony is looking back to the
Capital Purchase Program when the nine banks were summoned to
Washington, DC, and, as mentioned in my testimony, that is a
pretty good example of what could have been done.
There, of course, it was the principals that were involved
in the negotiation for both sides, whether it was Secretary,
then-President Geithner, Secretary Paulson, Chairman Bernanke
on behalf of the government, and the chief executive officers
of the nine banks on the other side. That didn't happen with
AIG. The forcefulness of those negotiations, being told that
this was important to the American people.
Now, I am not suggesting that threatening to pull their
license or using regulatory authority to punish those that
didn't participate, but emphasizing how important it was to
policymakers of the U.S. Government. That didn't happen with
respect to AIG. And indeed, again, these were conversations
that were done largely over the telephone with mid-level
executives.
Those nine executives were summoned to D.C. for the TARP,
and they were put around the table. And that communication,
that this is really important and we could, you know, I can
continue to speculate and give about 9 or 10 other things that
could be said, all I think within the confines of the Fed's
policy considerations.
Now, we have been somewhat critical of some of those policy
considerations, and you know, we disagree with some of them, as
reflected in the audit. But I think that what is bothersome is
that even if you accept all of those concerns, they could have
just tried a little harder, and maybe it would have been
unsuccessful. We don't know. But as I noted in my testimony, we
recently spoke to the French regulator, and they said if the
negotiations went something like that, they would at least be
willing to engage. And we know that UBS would have been willing
to engage.
And we don't know what the reaction is of the other
potential counterparties because that telephone conversation
from then-President Geithner or then-Secretary Paulson or
Chairman Bernanke saying, ``hey, this is important; we want to
you to be involved,'' we know they were talking to these CEOs
on a regular basis, but this wasn't elevated to that level, and
we will never know what the result might have been. But it may
have resulted in saving the taxpayers billions, if not tens of
billions of dollars, but we just don't know the answer.
Mr. Lynch. OK, thank you.
Mr. Baxter, maybe you have been asked this question before,
but in terms of the decision to make the payment at 100 cents
on the dollar, were you part of that discussion?
Mr. Baxter. I wasn't in the discussions with the
counterparties, Congressman, but I was part of the supervisory
team.
Mr. Lynch. How did you arrive at that? Could you tell me?
Mr. Baxter. I can try. First of all, there was a critical
deadline, Congressman, of November 10th, and that was the day
that AIG was going to announce a $25 billion loss in its 10-Q
for the third quarter, so we were looking at that. And we were
being told by the credit rating agencies that unless something
happened with respect to the credit default swaps on or before
November 10th that there was a strong probability of a
downgrade.
Now, a downgrade would have been catastrophic. It would
have brought us back to where we were in September, on the
brink of an AIG bankruptcy. So from those of us who were
working at the New York Fed, we looked at that as a hard
deadline. And the execution risk of failing to get the credit
default swaps torn up by that date was it would have put us
back on the brink of bankruptcy.
So that was the risk of deal failure. That was the
execution risk, so we had to get the deal done.
AIG had been unable, as Mr. Habayeb has testified, to get
those credit default swaps torn up. On November 6th,
Congressman, we got formal authorization from Stasia Kelly, who
was then AIG's General Counsel, to take over and see whether we
could get those credit default swaps terminated by deadline. So
we were operating against the clock to do that.
Our choices were should we push for concessions and try to
use whatever leverage we had to get those concessions? Or
should we simply go to par which would apply to every
counterparty, and the way par works is you offset the
collateral that these counterparties had been pulling out of
AIG against--you offset that collateral against the par price
of the bonds.
So those were the weighing of the risks as we faced them.
And on the one hand, failure to get a deal on or before the
10th would have brought us back to the brink of an AIG
bankruptcy. So the risk was in pushing for concessions of
perhaps 2 percent. We risked billions of further Federal
Government assistance.
Now, what happened? We asked eight counterparties about
concessions. Seven said ``no.'' Two of those seven were French,
and they were supported by the French Government in their
refusal. The one that said ``perhaps'' was UBS. It said perhaps
up to 2 percent, but we need to be treated just like everybody
else.
So had we continued to use whatever leverage we had, and as
I said earlier, we didn't have much, we risked losing the deal
by November 10th, and that would have brought us right back to
September, to the brink of an AIG bankruptcy and to
catastrophic systemic consequences that would have resulted.
That balancing led us to see that the solution would be to
go with no concessions. We brought that to President Geithner.
He agreed, and that is what we did, but we brought it home by
deadline. We got it done by the 10th.
Chairman Towns. The gentleman's time has expired.
I now yield 5 minutes to the gentleman from Indiana, Mr.
Souder.
Mr. Souder. Did I hear, Mr. Baxter, did you say that Mr.
Geithner signed off on paying at par as part of that decision?
Mr. Baxter. He did.
Mr. Souder. I didn't have that impression earlier, but
maybe I misunderstood something.
I am not sure who to ask this particular question to first,
but let me ask Mr. Barofsky. One of the questions here is, my
understanding was, to avoid the--and part of the question for
the secrecy, was to avoid the risk of the rating agencies
downgrading the securities and bonds. Is that true? Is that
your impression?
Mr. Barofsky. The Federal Reserve has cited as one of the
justifications for paying the counterparties at par was one of
the concerns about the effect on ratings agencies and the
impact.
Mr. Souder. And why hadn't they already been downgraded?
Mr. Barofsky. Well, they actually had been downgraded up
until that point, but----
Mr. Souder. Do you believe they were keeping up? In other
words, in the many hearings that you have been here and so on,
it seems to me that to have a private economy work, one thing
has to happen because, you know, CalFed, or whatever the big
insurance for State employees there, is the biggest, I guess,
investor, and he said he has only got a couple of people to
track. If those rating agencies aren't accurate, the whole
system collapses. And it seemed to be questionable whether they
were moving fast enough in the economy to downgrade it. And in
effect here, a partner in the Fed was trying to help disguise
it.
Mr. Barofsky. I mean, ultimately, one of the observations
in our audit is the outsize influence the credit rating agency
had throughout this process. As Mr. Baxter just stated, it was
basically the rating agencies that were holding the gun to the
head of the Federal Reserve, giving them the perception they
had to move so quickly. It was the rating agencies that gave
the fear to the Federal Reserve, and I am sorry, I don't mean
to, I am paraphrasing Mr. Baxter, but that fear that AIG would
be put into bankruptcy, that was a legitimate fear that the
Federal Reserve had because of the results of the rating
agencies.
And of course, so much of the lead-up to AIG's problems
were the result of the rating agencies. First, over-valuing the
CDOs and the bonds that underlie the credit default swaps, and
then throughout the process. Indeed, it was the rating agencies
who were ultimately looked at the original deal that the Fed
brokered with AIG and the high interest rate, and determined
that, too, would lead to an eventual downgrade. So, yes, they
had an outsize role in this for certain.
Mr. Souder. Mr. Baxter, my question to you would be how can
a free market economy work if the Fed tries to manipulate the
rating agencies by pumping money in and trying to conceal that?
Mr. Baxter. We never tried to manipulate the rating
agencies, Congressman. We took their observations as they gave
them to us, never tried to lever them in terms of what they
were going to do with respect to AIG. Instead, what we tried to
do was to restructure AIG to avoid a downgrade.
Now, in the context of November 10th, and this is an
important point with respect to the credit default swaps, had
that downgrade occurred, many of the counterparties would have
had a right to terminate their credit default swaps, which
would have enabled them to keep the cash collateral posted and
the bonds. And that is a critical piece here because the way we
restructured these credit default swaps, the Fed took the bonds
into our vehicle, Maiden Lane III. And remember, the bonds had
diminished in value from par to approximately half, and the
counterparties had gotten collateral for that diminution in
value.
As those bonds, which we now have in our vehicle, as those
bonds come back in value as our Nation emerges from the worst
financial crisis in 70 years, we capture that value in a
Federal Reserve vehicle. And so it is the offset, if you will,
in broad terms, conceptual terms, to the collateral that was
posted.
And so this is another important feature of the
restructuring that the Fed did which was far, far better than
the alternative of allowing there to be a rating agency
downgrade and those catastrophic consequences.
Mr. Souder. And why did you want to conceal that?
Mr. Baxter. Never wanted to conceal that, Congressman. It
is, and we tried----
Mr. Souder. Is it inaccurate to say that you asked for
special conditions where markets wouldn't be able to see, for
fear they might speculate if they saw that you were taking this
position?
Mr. Baxter. Well, first with respect to the schedule A, to
the shortfall agreement which had the counterparty names, the
CUSIPs, the tranches. It was never the intention of AIG or the
Fed for that schedule to be filed with a shortfall agreement.
So there was a misunderstanding in the beginning, I think, as
to why that wasn't attached.
Now, the Commission came back and said, we need that
exhibit attached, and then we made an application for
confidential treatment because we thought that information
would hurt the taxpayer interest in our vehicle. Now, the
information I am talking about are the counterparty names, the
CUSIP numbers identifying the bonds we hold, and the tranches.
After the hearing that occurred before this committee in March,
we and AIG changed our view on the counterparty names.
So the only information today that is confidential with
respect to the schedule A is the CUSIP numbers and the
tranches, the identifying information for the cards, if you
will, that the Fed holds in its hand in this vehicle. That is
what we are keeping confidential now, and for the right reasons
because we are worried when we sell out that portfolio that if
the street knows what we are holding, it will hurt the taxpayer
interest. That is the only reason. It is not a cover-up.
Chairman Towns. The gentleman's time is expired.
I now yield 5 minutes to the gentleman from Maryland, Mr.
Cummings.
Mr. Cummings. Thank you very much, Mr. Chairman.
Inspector General Barofsky, thank you again for all the
work you and your team have done over the last year. It has
been simply invaluable.
When I and 26 of my colleagues wrote to request that you
conduct an audit of the issues before us today, our main
concern was the decisionmaking process leading to paying AIG's
counterparties at 100 percent par value. However, after
Bloomberg and the New York Times published emails surrounding
the disclosure, questions began to emerge about how the events
surrounding the Maiden Lane III transactions were disclosed to
the SEC.
One of the first things I did was send you a letter asking
whether your staff already knew about the emails that were
released to the press and did these emails affect the
conclusions that you reached in your audit. I was also
interested in whether you planned to open the audit.
You responded quickly, as you recall, saying that it was
not your policy to comment on open investigations. Is that
correct?
Mr. Barofsky. Yes.
Mr. Cummings. All right. And I want to clarify, in your
office ``audit'' and ``investigations'' are different tasks
conducted by different personnel in different divisions. Is
that right?
Mr. Barofsky. That is correct, generally speaking.
Mr. Cummings. OK. And what are the missions of those
divisions?
Mr. Barofsky. Sure. Audit, as you know, under EESA, we have
the responsibility to both audit and investigate all actions
taken under the TARP. The best way I think to think of audit,
it is almost investigation without the presumption that there
was a crime or a violation. It is a review, a historical review
of what occurred, and in looking to see what went wrong, what
went right, and explaining, bringing basic transparency and
making recommendations.
Our Investigations Division is a law enforcement agency. We
are like the FBI for the TARP. It is populated generally by
special agents who have full law enforcement authority, guns,
badges, and the authority to make arrests. We also have
attorney advisers and support personnel. And when we move
something into the Investigations Division, it is because we
are taking a look to see if there was misconduct. If there is
some reason or there is an allegation or we suspect in certain
cases where there is a crime or even a civil violation, we do
support civil investigations as well, we move it over into that
section.
So with respect to your letter and the request, we didn't
receive many of the documents that this committee received,
including those documents, as well as some other documents that
pertain very directly to some of the issues directly addressed
in the audit.
Mr. Cummings. Does it surprise you that you didn't receive
them when you would, I mean, now looking back?
Mr. Barofsky. Some of the documents I am extremely
surprised that we didn't receive. And that is why we are
conducting a new investigation to determine what the
circumstances were of why specific documents that we requested
were not provided to us.
Mr. Cummings. So an open investigation is not the same as
an open audit. Is that right?
Mr. Barofsky. That is correct, sir.
Mr. Cummings. And I assume you cannot say whether the open
investigation is civil or criminal. Is that correct?
Mr. Barofsky. Well, an investigation at this stage in
particular, we are just starting out. We are just taking a look
and see where it goes. If it does result in our belief for a
referral for civil or criminal prosecution, we would do that.
We would then interact with the Department of Justice. We don't
have prosecutorial authority.
If we determine otherwise, especially with respect to these
investigations, we have the option of preparing an
investigative report which we will provide to you and this
committee reporting on our findings.
Mr. Cummings. Can you tell us what the timeframe is for
this? Do you just have to take your time and figure that one
out?
Mr. Barofsky. I mean, for us to do this right, 250,000
pages of documents that this committee received, we also
received. That is going to take us some time because we really
can't determine what we didn't receive until we go through
literally every page of those documents.
And given the significance and importance of this matter, I
usually drive my agents pretty hard and ask them to move very,
very quickly. In this instance, I told them above all to move
quickly, but we need to be very thorough and very accurate. And
that will be followed, as all investigations, by a series of
interviews once we get our hands around the documents.
So I hesitate to put a time.
Mr. Cummings. I understand. Bloomberg reported this morning
that you are, ``probing whether the New York Fed improperly
limited the release of information about payments to AIG's bank
counterparties.'' Is this correct or can you comment on that?
Mr. Barofsky. Yes. We also have opened a probe into some of
the allegations that came here. And again, I really want to
stress that when we open an investigation, we are not presuming
misconduct or anything like that. It has been suggested that
there was misconduct. Again, so what we are doing, it is our
job, our responsibility, our statutory responsibility when such
issues are raised, we have to go look at it.
And as I said, if everything was done in a legally correct
manner, we will report that.
Mr. Cummings. I see my time is up.
Thank you, Mr. Chairman.
Chairman Towns. Thank you very much.
I now yield 5 minutes to Congressman Bachus.
Mr. Bachus. Thank you.
Mr. Barofsky, I am going to ask you this question. You
know, Secretary Geithner says that they didn't disclose some
things, but now they have come, they have fully disclosed
everything and they are trying to inform the American people.
However, I think his testimony today appears to mislead the
American people, and let me ask you about that.
On page 10 of his testimony, he is talking about the AIG
bailout. We paid the fair market value at the time for the
assets. Essentially, what the Federal Reserve did was to
purchase these securities from the counterparties with a par
value of $62 billion for a purchase price of $27 billion. That
is not true, is it?
Mr. Barofsky. It is partially true.
Mr. Bachus. Partially true. What they don't say is they got
$27 billion of taxpayer funding and they got to keep $35
billion worth of collateral.
Mr. Barofsky. I mean, it is true in addition to the $27
billion that came from Maiden Lane III, all that other AIG
collateral that they previously had been paid, which was made
possible largely by the other loan from the Federal Reserve,
which was back-filled $40 billion by taxpayer money. And I
think in the Secretary's full testimony, he does acknowledge
that there is an AIG loss. What we cite in our testimony was a
statement that was put out by Treasury which was completely
unbalanced and gave the impression that the taxpayers would be
made whole because of that narrow issue of Maiden Lane.
Mr. Bachus. Well, that is actually what this statement this
morning to me says that they purchased securities with a par
value of $62 billion for a purchase price of $27 billion.
Mr. Barofsky. It is literally true in the Maiden Lane III
facility. That is what occurred. It is literally true.
Mr. Bachus. Yes. He said in the end, the prices paid for
the securities were their fair market value. That is not true
either, is it?
Mr. Barofsky. Well, again, with respect to the Maiden Lane
III part of it, it is literally true, but to look at these
transactions as a whole, the counterparties did receive 100
cents on the dollar for those securities and for tearing up the
credit default swap contracts. So the total compensation when
you include the collateral they were able to keep was
effectively par value.
Mr. Bachus. Because the counterparties, they received $62
billion in all, $27 billion of it paid directly from the
special purpose vehicle.
Mr. Baxter, Mr. Friedman, you would agree with that? They
received $27 billion from the special purpose vehicle, is that
correct?
Mr. Baxter. I think it is very important, Congressman
Bachus, to understand that we paid for multi-sector CDOs with a
par value of $62 billion.
Mr. Bachus. Right.
Mr. Baxter. Our vehicle paid $29 billion.
Mr. Bachus. $29 billion, all right.
Mr. Baxter. Now, $27 billion went to the counterparties; $2
billion went to AIG. Another important aspect of this is then
we received those multi-sector CDOs into our vehicle.
With respect to the cash collateral that AIG posted, this
is important. This is important.
Mr. Bachus. But what I am saying, to say that----
Mr. Baxter. We now can recapture that because as those
multi-sector CDOs come back in value as our Nation emerges from
the worst financial crisis in 70 years----
Mr. Bachus. I understand about the worth, but what I am
saying----
Mr. Baxter. Then the value comes back.
Mr. Bachus. But what I am saying, it was $27 billion and
then it was $35 billion worth of collateral that the
counterparties were allowed to keep.
Mr. Baxter. Which they were legally entitled to.
Mr. Bachus. Oh, I understand that, but what I am saying to
say that this, you know, that for $27 billion you get $62
billion worth of asset is certainly not the whole truth, is it?
Mr. Baxter. The whole truth, Congressman, is you have----
Mr. Bachus. No, I am asking you.
Mr. Baxter. I am trying to answer your question. You have
insurance policies in the form of a CDS. You have assets that
are insured. We got the assets. What happened with AIG is they
got to tear up the insurance policy that was threatening its
survival.
Mr. Bachus. Right. I understand all that. I mean, I have
heard that repeatedly.
Mr. Baxter. That is the whole truth.
Mr. Bachus. But he also says that the fair market value,
that you paid the fair market value. But some of these CDOs,
some of them they were rated CCC or lower, and the market
prices at the time, a lot of them were 20 cents and below that.
Is that not correct?
Mr. Baxter. Well, Congressman, I am a lawyer. I won't
comment on the value of any particular asset because it is
beyond my competence. In our view and the view of our experts--
--
Mr. Bachus. Well, BlackRock, who the Fed hired, they said
that they valued the paper at the average of less than 50 cents
on the dollar. That would have been somewhat less than $31
billion.
Mr. Baxter. In November 2008 at one of the worst points in
our financial crisis, the loan we made from the Fed to Maiden
Lane III, the vehicle that is holding the assets, is a 6-year
loan and we have a right of renewal. So we can hold these
assets.
Mr. Bachus. Oh, I understand all that, but I am saying at
the time you paid par for something that was trading--BlackRock
says they were trading 50 cents on the dollar.
Mr. Baxter. We paid fair value.
Mr. Bachus. All right.
Chairman Towns. The gentleman's time is expired.
I yield 5 minutes to the gentlewoman from New York,
Congresswoman Maloney.
Mrs. Maloney. Thank you, thank you very much for yielding,
Mr. Chairman, and ranking member for holding this hearing.
Along with many of my colleagues, we pushed very hard to
have full disclosure and I would like to put in the record
letters that I wrote to the Fed requesting full disclosure,
along with letters from many of my constituents.
Chairman Towns. Without objection, so ordered.
[The information referred to follows:]
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Mrs. Maloney. OK. I would like to get back to Mr. Bachus'
questioning, Mr. Baxter, where you bought the $62 billion for
$29 billion. My question is, what is the value now?
Mr. Baxter. The value now, I can't say, Congressman.
Mrs. Maloney. Well, did the taxpayers win or lose?
Mr. Baxter. Right as of today, we have a situation where
our loan balance is $4 billion less than the amount of the
portfolio, which I will estimate and I think I need to
estimate, our loan balance is around $17 billion and the
portfolio is around $21 billion or $22 billion.
Mrs. Maloney. Well, let's get back to the line of
questioning from Mr. Cummings. I know, and we all know that we
released the names of the counterparties, but I understand that
you still want to withhold other information concerning these
assets. And what is that information? And why do you want to
continue to keep it a secret?
We believe, in Congress, many of us, that sunshine is the
best disinfectant, and anti-corruption and fraud deterrent. So
why do you feel this should be kept secret? What is it and why
do you feel we want to keep it secret?
Mr. Baxter. The information that we are still concerned
about at the Fed on the schedule A to the shortfall agreement
is information about the CUSIP numbers and tranches of the
multi-sector CDOs that the Fed now has in Maiden Lane III, its
vehicle. Our experts, BlackRock, tell us that if we publish
that information, when the day comes, and it may be 4 years, it
may be 6 years, it may be longer, when the Fed wants to sell
those assets, that we will be hurt. We will be hurt because
traders in the market will know what we are holding. Like in a
card game, if one player shows his hand to everyone else, that
one player is prejudiced.
So that is the worry. The worry is it will injure the
taxpayer interest if we show our hand, if we show our CUSIP
numbers and our tranches. So that is the key. And we applied
for----
Mrs. Maloney. Well, Mr. Baxter, reclaiming my time, isn't
it standard policy for investors to disclose holdings like
these in securities filings?
Mr. Baxter. Well, these particular multi-sector CDOs, it is
not customary, I am told, for investors to put this information
out. And if you do, again I am relying on what experts at
BlackRock have told us, if you do, you can be gamed by hedge
funds and sophisticated players when the time comes when you
want to sell.
Mrs. Maloney. So you are saying that the public, the
taxpayer would be at greater risk in the ability to reclaim
these funds if this information was disclosed. Is that true?
Mr. Baxter. That is true, Congresswoman. I would also
wonder why the average American would need to know the precise
CUSIP numbers and tranches of the Maiden Lane portfolio. It is
the kind of information that, at least in my household, my
family wouldn't know how to interpret. But sophisticated
players, hedge funds, traders on the street, they could game us
if that information was out there.
Mrs. Maloney. Going forward, the Financial Services
Committee has passed a regulatory reform bill that includes in
it resolution authority which would be a wind-down authority so
hopefully we would not be in this type of crisis again.
And I would like to ask Mr. Friedman from, you say you
weren't privy to this information, but your experience in
finance, do you think things would have been different if there
was a more formal process for AIG such as this resolution
authority? And could you tell us the difference between
government or taxpayers bailing out AIG and Lehman, which is a
question many of my constituents are perplexed over. What was
the difference between the two in response?
Mr. Friedman. Yes, thank you, Congresswoman.
As I mentioned when you and many of your colleagues were
voting, the Board of the Federal Reserve Bank of New York has
ring-fenced away from these supervisory regulatory or, and
certainly these extraordinary issues. So I have no direct
knowledge from that standpoint of this.
So what I am giving you is my opinion just as a person
who's been around markets for many years. I do believe that for
our financial system to work effectively, we have to get away
from too big to fail, too intertwined to fail. I think these
are dangerous things, and I earnestly hope that as Congress
works its way through restructuring our financial regulatory
system, they will have some form of resolution authority to
give the people who are on the firing line the next time a
crunch comes, and one will come at some point in the future,
the ability to effect some sort of a conservatorship or
resolution to wind down these entities.
I think that people who are making money in markets should
be at risk of losing money. But if there is not the ability to
do this without jeopardizing the entire financial system of the
country, very much including Main Street, I think people get
their hands tied behind their backs. So I earnestly hope we
will have some kind of a resolution authority.
As far as the difference between Lehman Brothers and AIG, I
have no direct inside knowledge of this. I can say that AIG was
a, to an outside observer, much bigger, more complex and even
more dangerous to the economy type of a situation, and there
may well have been, and this Mr. Baxter would be much better
able to answer than I, there may have been very much a
difference in terms of the Fed's ability to enter into it based
on the quality of the collateral they could get, but that I
can't speak to personally myself.
Chairman Towns. The gentlewoman's time has expired.
Mrs. Maloney. Thank you, Mr. Chairman.
Chairman Towns. I yield now 5 minutes to the gentleman from
Illinois, Congressman Davis.
Mr. Davis. Thank you very much, Mr. Chairman, and I thank
each of you for being here.
Mr. Friedman, let me ask you, what was the role of the
Board of Directors of the Federal Reserve Bank of New York in
the decision to compensate AIG counterparties at par?
Mr. Friedman. Yes, sir, my strong understanding and
recollection of our role is that we were in effect an advisory
board on most issues, with administrative responsibilities for
things like controls, audit committee, etc. And so we were
walled away, ring-fenced away from regulatory issues,
supervisory issues, or the extraordinary types of emergency
interventions that took place during 2008.
If you think of the makeup of the Board, during my tenure
something like six of the nine members either had some
affiliation with banks or with financial institutions, so there
would have been myriad conflicts if we had been involved.
In my experience, the staff of the bank was very meticulous
in keeping us involved in these transactions, so I can say that
I played no role in any of these decisions or in ratifying
them. I have been advised very recently that on the night that
the AIG transaction was finalized, I and the chairman of our
Audit Committee received a courtesy summary briefing from Fed
officials telling us what had happened and that this would be
announced the next morning.
So I hope that is responsive.
Mr. Davis. Well, let me ask, during the time period in
October and November 2008, when the Federal Reserve Board of
New York's staff were deciding how to address the problems, how
to deal with them, did you get any briefings from the staff on
the actions that they were taking and the policy options that
they were considering?
Mr. Friedman. I recollect no such briefings during the
period that they were trying to determine what to do. I have no
recollection of ever being asked for my views or proffering my
views. I have a recollection of, after the September
intervention when AIG was carried out, that evening being
getting a courtesy summary posting from Mr. Geithner telling us
what they had done, which would be in the newspapers the next
day. And all of this was consistent with a design, as I
understand it, of the statute that a prior Congress passed for
how the Federal Reserve Banks should operate.
Mr. Davis. You are on the Goldman Sachs Board of Directors?
Mr. Friedman. Yes, sir.
Mr. Davis. And you were on the Goldman Sachs Board of
Directors in late 2008?
Mr. Friedman. Yes, sir.
Mr. Davis. As the chairman of the Federal Reserve Board of
New York, the Bank Board of New York Board of Directors, do you
think your access to information and the decisionmaking process
at the Fed gave Goldman Sachs an advantage in weathering the
storm when there were so many other firms floundering and
folding?
Mr. Friedman. Sir, absolutely none, because the staff of
the Federal Reserve Bank of New York, in my experience, was
very careful and meticulous to keep us away from any
information that would be of the type of nature you talk about.
The potential for conflicts was rife there.
You know, the purpose of that Board, the primary purpose,
as I saw it, was it gave the president of the bank a group of
knowledgeable market people that he could get information from
as to what was happening in their areas, their business areas,
and their communities. And I would speculate that if you had a
Federal Reserve Bank in an area in the Southwest, you would
want oil expertise. In an agricultural area, you would want
people with farm expertise.
We had a lot of financial market expertise, but the
discussions were at the level of what are you seeing in the
markets, what are you seeing in the economy. They wouldn't ever
tell you what was happening in another bank, which was probably
a competitor of one you were affiliated with. And I just think
it was handled in a very professional and meticulous fashion.
Mr. Davis. So the firewalls were there that would prevent
any conflict of interest?
Mr. Friedman. In my experience, they were very carefully
supervised, sir, and I never had a sense that anyone had any
desire to transgress.
Mr. Davis. Thank you very much.
Thank you, Mr. Chairman.
Chairman Towns. The gentleman's time is expired.
I now yield myself 5 minutes, but I will yield a minute to
the gentleman from Massachusetts before I raise my questions.
Mr. Lynch. Thank you, Mr. Chairman.
Mr. Friedman, just following up on Mr. Davis' question. I
am concerned about the overall influence of Goldman Sachs in
Treasury and at the Fed. And I think your own situation is
somewhat instructive. As I understand, you were previously on
the Goldman Sachs Board of Directors.
Mr. Friedman. I was. During the period you have been
discussing I was and I am still on this.
Mr. Lynch. Right. OK. And then you became a member of the
New York Fed Board of Governors?
Mr. Friedman. Yes, sir.
Mr. Lynch. OK. And while you were there, apparently you
owned a significant amount of shares in Goldman Sachs, but that
was OK at the time because they were not a bank holding
company. Right?
Mr. Friedman. Yes, sir.
Mr. Lynch. And then when they became a bank holding
company, you had a decision to make, and that was to either
divest, right? Or get a waiver?
Mr. Friedman. Yes.
Mr. Lynch. And you applied for the waiver.
Mr. Friedman. Well, the Fed staff applied for the waiver. I
did not apply for the waiver.
Mr. Lynch. OK. And then while the waiver was pending, you
bought 37,000 more shares of Goldman Sachs.
Mr. Friedman. Yes.
Mr. Lynch. What was the thinking behind that?
Mr. Friedman. Let me tell you what the--when I went on the
Fed Board, the Fed Reserve Board, I was a director of Goldman
Sachs. I had Goldman Sachs shares and I would be regularly
receiving Goldman Sachs shares as part of your directorship
grants.
Mr. Lynch. I get that part, but if you are not in
compliance and you are asking for a wavier, what about the
decision to buy 37,000 more shares of Goldman Sachs?
Mr. Friedman. OK. At the time Goldman Sachs became a bank
holding company, I then became technically ineligible to be a
Class E Director. So there were a number of options.
I was not going to at that point, it would not have been
feasible for me to resign from the Goldman Sachs Board and sell
all my shares. I had done that several years before when I went
to take an administrative post in a prior administration. So
that left two options. One was for the Fed to basically say
your status has changed; you need to resign, in which case I
would have promptly saluted smartly and resigned that
afternoon.
Mr. Lynch. Excuse me, sir. I am sorry, but your answer is,
for the last 3 minutes, has been unresponsive. So you knew you
were not in compliance. You had to apply for a waiver to stay
in that position, yet you bought 37,000 more shares. Can you
please, and I don't mean to badger you, but could you answer
that part of the question?
Mr. Friedman. I will. My understanding of the practices and
precedents of the Federal Reserve was that during the pendency
of a waiver, you continued on in your role as a director and
the rules were in abeyance. And that was actually the practice
of what happened. I continued chairing the Board. Ultimately
during this period, when Mr. Geithner was tapped to go to
Washington----
Mr. Lynch. I still don't understand.
Mr. Friedman. And I during this period, I made a decision
in December to buy some Goldman Sachs shares. This did not
change the eligibility at all because----
Mr. Lynch. You just owned more. Here is the problem, as a
member of the Board of Governors, you are making decisions on
matters that directly affect Goldman Sachs. And you are a
former shareholder, current shareholder, and then you buy
37,000 more shares of that company that you are overseeing.
Mr. Friedman. Yes.
Mr. Lynch. Therein lies the problem. Let me ask you, I
notice in dealing with Treasury and the Fed that there are a
lot of Goldman Sachs employees all over the place here. Is
there any type of program where Goldman encourages their
employees to sort of salt the regulators' offices that they are
regulated by?
Mr. Friedman. Certainly none whatsoever in the sense of,
gee, this is some kind of a firm strategy. That I can tell you.
Mr. Lynch. Yes.
Mr. Friedman. What there has been over the years is a
certain tradition that you work here, you try to do well for
yourself and your family, and then you give back and you do
public service. For many years, this was regarded as a very
constructive and positive thing.
Mr. Lynch. I can see that.
Mr. Friedman. Lately, it has gone the other way and people
are thinking is there some ulterior motive.
Chairman Towns. Reclaiming my time, reclaiming my time. It
was, you know, initially it was a minute, you know.
Mr. Lynch. Thank you. You have been very generous, Mr.
Chairman.
Mr. Issa. I would ask unanimous consent that the chairman
have an additional minute added.
Chairman Towns. Thank you very much. I appreciate that.
Let me just say that we are going to close out. But just
before we close, Mr. Friedman, let me just ask you. You still
sit on the Board of Goldman Sachs. Right?
Mr. Friedman. Yes, sir.
Chairman Towns. The CEO of Goldman Sachs has said that he
didn't need the billions he received in counterparty payment
from AIG. He said he didn't really need it. If that is the
case, why doesn't Goldman Sachs give back the money? Mr.
Friedman, my advice to Goldman Sachs is just come clean and say
you need the money and you appreciate the fact that the
American taxpayers were so generous. Why not?
Mr. Friedman. You were talking, sir, about a financial
transaction where the Goldman Sachs people were in a commercial
transaction with AIG.
Chairman Towns. That is correct.
Mr. Friedman. And they had entered into at a time when AIG
was a AAA company and they were doing it, acting as
intermediaries for Goldman Sachs clients. They had worked very
carefully on their risk management to protect themselves
against a deterioration in the value of these CDOs or in the
deterioration of the value of AIG, and they felt that they were
fully hedged and had protected their shareholders' interest.
I do not think that there is any feeling there that they
did anything other than what a market participant would do in
the normal course.
Chairman Towns. You are saying they did not need it. Is
that what you are saying?
Mr. Friedman. Well, what I would say was this. Goldman
Sachs has consistently said--there was something like $20
billion, round numbers for illustrative purposes, of
instruments that they sought insurance on. There was a
deterioration in the value of that. Let's say, illustratively,
roughly half. They felt that AIG, from whom they had purchased
this credit insurance, owed them $10 billion. They had $7.5
billion of collateral. That left a shortfall of $2.5 billion.
They had purchased insurance on AIG's survival from other major
institutions and had collateral and netting arrangements with
these other institutions.
So what they have consistently said is that their direct
exposure, and they have used that word, direct exposure, to AIG
was not material.
Now, I am not going to say that, and this may be the point
that the SIGTARP made, but I am not going to say that in the
event of a financial Armageddon, all bets weren't off, but they
are the stewards for the money of their shareholders.
Chairman Towns. All right.
Mr. Friedman. And that is the----
Chairman Towns. Thank you very much.
Mr. Issa. Mr. Chairman, just a couple of quick UCs? I would
ask unanimous consent that all Members have 5 legislative days
in which to submit both their opening statements, and any
followup questions to any of our witnesses.
Chairman Towns. Without objection, so ordered.
Mr. Issa. I ask unanimous consent that the letters earlier
submitted, that if the Chair would eliminate his reserve at
this time. These are letters that you were copied to a long
time ago, hopefully.
Chairman Towns. Right. Definitely. Still reserving the
right to object because some of them I am not sure I have seen,
so I want to make certain that we see them. I don't really see
a problem, but just in case there is a problem, I want to
reserve the right.
Mr. Issa. OK. Well, actually, I will withdraw my UC on that
and simply submit them as new questions for the record. Perhaps
that would be easier.
Chairman Towns. Without objection.
Mr. Issa. And then last, the UC on, or second last, the UC
on the schedule A. Are you prepared to withdraw your
reservation on that at this time?
Chairman Towns. I am prepared to withdraw.
Mr. Issa. Thank you, Mr. Chairman.
And last, earlier you had said that you would compel
witnesses to answer. It is the custom of the committee that it
be 7 days. Could I have unanimous consent that 7 days after
their receipt, they be expected to respond to our questions?
Chairman Towns. Without objection.
Mr. Issa. Thank you, Mr. Chairman, and thank you for
holding this incredibly successful hearing. I think this is
probably our finest bipartisan hour. I think the witnesses,
whether they liked the questions or not, would certainly agree
it was bipartisan.
I yield back.
Chairman Towns. Thank you very much.
Let me thank all of our witnesses for being here today, and
of course we really appreciate the fact that you have taken the
time to come.
And without objection, I enter this binder into the
committee record.
But before we adjourn, let me state that if the AIG bailout
and the Government's involvement in it teaches us anything, it
shows that deals with the taxpayers' dollars that are made in
secret results in distrust and deep, deep, deep disappointment.
When taxpayers' dollars are involved, transparency must be
first and the last focus of the government.
Again, let me thank you very, very much for your testimony.
Mr. Bachus. Mr. Chairman.
Chairman Towns. I yield to the gentleman from Alabama.
Mr. Bachus. Could I, with your leave, just mention one
email in particular that I think highlights what you just said?
Chairman Towns. Let me just say to you, put it in writing.
He will answer it, and we will move forward.
Thank you very much.
[Whereupon, at 3:22 p.m. the committee was adjourned.]
[The prepared statement of Hon. Gerald E. Connolly and
additional information submitted for the hearing record
follow:]
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