[Congressional Record (Bound Edition), Volume 155 (2009), Part 6]
[House]
[Page 8143]
[From the U.S. Government Publishing Office, www.gpo.gov]




                          AIG: THE REAL STORY

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentleman from Florida (Mr. Grayson) is recognized for 5 minutes.
  Mr. GRAYSON. Do you want to know why AIG went broke, threatening to 
bring down the whole U.S. economy? It's actually easy to find out. All 
you have to do is wade through 500-plus pages in the form 10-K that AIG 
filed 2 weeks ago. It's all in there, and I read it.
  Now, derivatives certainly contributed to the problem. That's why the 
``stress test'' on Page 178 says that AIG owes $500 billion, yes, $500 
billion, if long-term interest rates go up by just 1 percent, as 
opposed to only $5 billion, according to Page 183, if San Francisco is 
destroyed in an earthquake. So now we know why the Federal Reserve has 
been buying long-term bonds just as fast as the Chinese sell them: to 
keep its ward AIG from being liable for $500 billion, because $500 
billion is a lot of money, even to the Federal Reserve.
  And to whom would AIG owe that money? The answer is on Page 176. 
AIG's largest credit exposure, which is 160 percent of its shareholder 
equity, is to ``Money Center/Global Bank Groups.'' In other words, Wall 
Street. And almost half of that amount is owed to only five banks.
  But the real AIG losses have come not from derivatives but rather 
from AIG's basic business model. In a news release last Monday, AIG 
said that it had to make payouts of $43.7 billion to ``securities 
lending counterparties.'' That's the phrase: ``securities lending 
counterparties.'' The news release doesn't explain what that is, but 
AIG's 10-K does.
  The standard insurance business model is as follows: You make money 
from minimizing your claim payments, and you make more money from your 
investments. Warren Buffett has explained this countless times in 
Berkshire Hathaway's 10-Ks. It's a stable, steady business. Indeed, 
AIG's insurance subsidiaries took in premiums, AIG invested them, and 
AIG paid out on claims.
  But that's when things went horribly wrong. According to AIG's 10-K, 
AIG's parent company sucked the investment assets out of its insurance 
subsidiaries and lent them to Wall Street and foreign banks in return 
for cash. AIG then took this borrowed cash and invested it--are you 
ready for this?--in mortgage-backed securities.
  It's not in AIG's 10-K, but the counterparties, that is, its friends 
on Wall Street, undoubtedly took the stocks and bonds borrowed from AIG 
and sold them short. That's why institutions borrow securities: to sell 
them, buy them back later at a lower price, return them, and claim the 
profit. So as the markets dropped, AIG's counterparties laughed all the 
way to the bank. Except they are banks.
  And what about AIG? According to the first few pages of AIG's 10-K, 
when the counterparties returned the securities to AIG, AIG had trouble 
coming up with the cash because, first of all, the mortgage-backed 
securities market had blown up, and, secondly, the securities that AIG 
had lent out were actually worth far less at that point. Hence the 
Federal bailout at $150 billion and counting. And this money, by the 
way, this money that the Federal Government is giving to AIG, AIG 
implausibly lists that money as ``shareholders' equity'' and not loans 
on its own financial statements.
  Now, why would AIG do something as convoluted and nutty as this? To 
goose its profit a few points by counting both the returns on the lent 
securities and the returns on the mortgage-backed securities both as 
its profit. In other words, the motive was greed.
  Obviously, AIG shouldn't have done this, and no insurance company 
ever should be able to do it in the future. This is the kind of 
financial innovation that brings into focus why we need to regulate in 
order for this country to survive. The choice is not between regulation 
and freedom; the choice is between regulation and chaos.

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