The Senate Banking Committee, chaired by Chris Dodd, held a Hearing this week, on what to do about "bottomless pit" otherwise known as AIG.
With the latest $30B "investment" in AIG,
the government has committed more than $170 billion to prevent AIG's collapse.
Hearing Title: American International Group: Examining what went wrong, government intervention, and implications for future regulations
The whole CSpan session is worth watching it you have the time, but I will try to summarize some of the more noteworthy issues ...
Starting with the Bloomberg report:
Fed Refuses to Release Bank Data, Insists on Secrecy
And it seems that Bloomberg doesn't like the Fed's Stonewalling
and has decided to:
Bloomberg sued Nov. 7 under the U.S. Freedom of Information Act, requesting details about the terms of 11 Fed lending programs.
What is it, that the Fed is NOT saying ... ???
Members of the Senate Banking Committee pressed Federal Reserve Vice Chairman Donald Kohn about why his agency has refused to disclose the trading partners of AIG who have benefited from the government's rescue package ...
"My judgment would be that giving the names would undermine the stability of the company," Kohn said.
That answer did not sit well with lawmakers.
"Public confidence in what we're doing is at stake, it's their money that is being poured into these institutions," Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, told Kohn. "That kind of an answer undermines that very significantly."
...
Senators criticized the federal assistance to AIG, calling the company "a bottomless pit," "a lost cause," and "a very disturbing story of malfeasance, incompetence and greed." They warned Kohn that the administration should not expect another dime from Congress if it does not improve transparency.
"You will get the biggest 'No' you ever got," a red-faced Sen. Jim Bunning (R-Ky.) told Kohn.
(emphasis added)
Senators Call AIG 'Lost Cause'
By Brady Dennis - Washington Post Staff Writer - Mar 6, 2009
This Fed Vice Chair, Donald Kohn, used his best "Fed Speak" to discourage Congress from prying too deeply into, just where All those truck loads of AIG billions went -- but without much success. Finally those Senators, on both sides of the aisle seem to be showing some righteous indignation, about the "White Collar Coddling" that the Fed has been promoting:
"It's not clear who we're rescuing - whether it is whatever remains of AIG or its trading partners," U.S. Sen. Christopher Dodd, D-Conn. said. "AIG's trading partners were not 'innocent victims' here - they were sophisticated investors who took enormous, irresponsible risks."
...
"It's reasonable to ask why holders, who would have received only pennies on the dollar for their credit default swaps absent any government intervention, would expect or deserve payments for what essentially is a bankrupt company," Dodd asked.
Federal Reserve Vice Chairman Donald Kohn, repeating the frequent argument heard from Treasury and Fed officials explaining their actions, on Thursday said a "disorderly" collapse of the firm would have disastrous economic effects.
"The failure of AIG would impose unnecessary and burdensome losses on many individuals, households and businesses, disrupt financial markets, and greatly increase fear and uncertainty about the viability of our financial institutions, " Kohn told the Senate Banking Committee.
(emphasis added)
US Lawmakers Clash With Fed Over Strategy On AIG Rescue
By Michael R. Crittenden - Dow Jones - Mar 5, 2009
Here is the "short" version of Fed Kohn's weaseling:
Fed on AIG won't release NAMES ...
http://www.youtube.com/...
Here is the whole CSpan session of the Senate Banking Committee Hearing on AIG, which like I said before, is really worth watching, it you have the time. The debate for Re-regulation, has just kicked into another gear ...
The Expert Witnesses:
Eric Dinallo, New York Insurance Superintendent
Donald Kohn, Federal Reserve Vice Chairman
Scott Polakoff, acting director of the Office of Thrift Supervision
Direct video link
Alternate video link
I was SO impressed by the Questions of freshman Senator Jeff Merkley, another Progressive Voice from Oregon, that I decided to transcribe most of it, for the public interest:
Jeff Merkley question period:
01:55:00 -- 02:05:00
01:58:20
Jeff Merkley: "I will say, it is kind of a sad commentary on our Regulatory System -- when all it takes is changing from 'Insurance' to 'Swap' in order to by-pass Regulation. One of the things I'm concerned about is the role that these Insurance Contracts had in essentially 'Putting lipstick on a Pig' -- that is, CDOs and CDOs-squared, that were then insured, and by 'insuring' them you were able say to Pension Funds an other financial entities that were buying these Contracts -- or buying these 'Products, that 'Look Don't Worry -- they're insured!' and this insurance was unregulated. That sounds like a 'House of Cards' ... this that kind of a fair way to portray it?"
...
02:00:00
Eric Dinallo: "I have called them [CDS] the 'Great Enablers' of this Financial Catastrophe" -- because many people thought they had had essentially an Insurance Policy, when in fact, they didn't have nearly the solvency behind it.
...
02:01:20
Eric Dinallo: "I think when you look what happened, historically, I think you see the worse form of 'Moral Hazard' -- and the lack of any kind of Retention of Exposure in the underwriting process -- which would be kind of a short story of the the 'Mortgage Meltdown'. But at the end, when people finally bought those Securitized Instruments, they went in the Marketplace and thought that they were essentially safe, because they had 'Credit Default Insurance' on those."
Jeff Merkley: "I just want to make sure I captured your comment correctly, that the Credit Default Swaps were a 'Great Enabler' of the major "Financial Meltdown" were experiencing?
Eric Dinallo: " ... A 'Great Enabler' -- Absolutely, because every Asset Manager who was holding those CDO's essentially turned to his Risk Manager and said 'I've got Insurance on these -- I got the Down Side Covered.' But there wasn't near the Capital behind them."
...
02:03:00
Jeff Merkley: "So several people have spoken to the role of the Triple-A Rating, being 'borrowed', or 'used' if you will. We have inherent conflict of interest, in which Rating Agencies are paid by the firms, that they're rating. We are all trying to learn lessons from this, how we are going to go forward and do this, far, far better -- to restore a Financial System with integrity. How are we going to resolve this issue, of the inherent conflict of interest of the Rating Agencies, and the use of Triple-A Ratings, in apparently inappropriate circumstances?"
Eric Dinallo: "Well, this week I had an Op-Ed published in the Wall Street Journal, about our proposal to create a 'Buy-Side' Rating Agency, so that the interests are aligned between the Purchasers of the Securities, or the Bonds, and the Rating Agencies. Right now you have this inherent conflict, because essentially the issuers of the 'Products' pay for the Ratings. And our proposal is that the Insurance industry is large enough -- and a big enough 'User', as are the Regulators, of both the Ratings, and of Municipal Bonds and other Structured Instruments -- in fact I think, it's about 3 Trillion Dollars -- that a very modest amount paid by the Insurance industry, could fund such a Rating Agency. And the problem of 'free riding' would be taken away, because the Regulators would essentially have the Rating Agencies would require it, and require it as part of the Capital calculation of the Insurance Company's Assets.
And then you could expand that to all Financial Services -- you could essentially have ALL Financial Services paying in to a very modest amount to fund 'Buy-Side' Rating, and make it required by the Regulator, used by the Regulator, so you take out the the 'free riding' problem."
Jeff Merkley: "You all share the, that strategy, Mr. Kohn and Mr. Polakoff?"
Donald Kohn: "I think it is a strategy worth pursuing, I do think at the same time, the SCC and others, and the SCC has proposed a series of changes in the Regulations, of Credit Rating Agencies, to make them more transparent. To have them publish the history of what they've rated, so that people can judge -- to make it so that the -- if somebody starts shopping around from Credit Rating Agency to Credit Rating Agency, they would have to publish that amount. Meanwhile, there's a lot we can do to make the Credit Rating Agencies better."
(emphasis added)
That Eric Dinallo, sounds like a State Regulator (NY) looking for real solutions. And that 'Buy-Side' Rating system he's proposing sounds like a real 'Demand Side' solution, which could put an to end the "Phantom Wealth" Bubble Schemes, that those Wall Street Bankers and Hedge Funds, are SOOOO devious, at dreaming up:
Buyers Should Pay for Bond Ratings
By Insurance Superintendent Eric Dinallo
The solution is for investors to buy and control publicly available bond ratings. Insurance regulators, who use ratings to determine capital reserves for insurance companies, can contract with rating agencies on a competitive basis to provide public ratings of issuers and their securities. This approach would solve the conflict-of-interest problem, because the primary users of the ratings are the ones who will be paying for them.
...
The collapse of confidence in ratings paid for by sellers has caused and sustained the disruption in our credit markets. A buy-side system can finally restore integrity to a rating system that has lost the trust of regulators, legislators, markets, purchasers, the press and the public. It's time for a change.
-- This op-ed by New York State Insurance Superintendent Eric Dinallo appeared in the March 3, 2009 edition of the Wall Street Journal.
http://www.ins.state.ny.us/...
Sounds like a fine system of financial "checks and balances" to me. Maybe the Fed could start there, if they really are interested in "Transparency", as Donald Kohn claims?
Post Script: About those "AIG trading partners" [the counter-party Holders of all those Toxic Assets] that the US Tax payer is STILL Bailing out -- those "secret" partners, whom to date, have assumed NO risk of their own, for their own very Risky investments with AIG --
Well the Fed might not, be Talking, or Naming their Names -- But the Wall Street Journal has started to talk:
Fed's Kohn Concedes Risk in AIG Rescue
By Sudeep Reddy and Michael R. Crittenden - WSJ - Mar 6, 2009
The Wall Street Journal in December, citing a confidential document and people familiar with the matter, revealed that about $19 billion of the payouts went to two dozen counterparties between the government bailout in mid-September and early November. As previously reported, nearly three-quarters went to a group of banks, including Société Générale SA ($4.8 billion), Goldman Sachs Group ($2.9 billion), Deutsche Bank AG ($2.9 billion), Credit Agricole SA's Calyon investment-banking unit ($1.8 billion), and Merrill Lynch & Co. ($1.3 billion), the Journal reported at the time.
http://online.wsj.com/...
And as reported a few days ago, by the DailyKos' The Anomaly
AIG Counterparties Revealed!
by The Anomaly - Wed Mar 04, 2009
...
In Wednesday’s article by Declan McCullagh at CBS News ...
One aspect of the repeated AIG bailouts that deserves additional public scrutiny is how they enriched some of the company's counterparties at taxpayer's expense.
Those are the bailout's indirect beneficiaries, and they reportedly include Goldman Sachs, Merrill Lynch, UBS AG, and Deutsche Bank AG. They knew there were risks to dealing with AIG; the financial world would not end if AIG defaulted. (As George Mason University economics professor Tyler Cowen put it this week: "No one wants to say it, but essentially the Fed has been bailing out European banks.")
The Feds' Bailout Black Hole
Bailouts Are Hard To End - One Reason Not to Start Them, Says Declan McCullagh -- March 4, 2009
So there you go Senators -- if you want answers, maybe you should check Progressive Blogs first!
Back to Senator Dodd's Main Question:
Who have the American Taxpayer, been bailing out with our AIG Billions (170B and counting ...)
Poor little old "European Banks" that's who ...
Tell me again, why the "Invisible Hand" of the unfettered Global Capitalism, is a good thing again?
The only thing that "Invisible Hand" seems to be very good at, is "picking the pockets" of the Workers, and then quietly exiting the building -- stage left! ... With all their Golden Parachutes, still very much intact.
Greed -- it's a terrible thing!
Just ask a your neighborhood Shadow Banker -- that's if, you can still find one!
Transparency Now!
(that means you - Federal Reserve, the back room coordinator, for those Shadowy Interests -- who Shall NOT be Named!)
Please spare us the "Uncertainty" and all the "Fed Speak", and spell it out, already -- Enough with the Opaque Charade!