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THE FEDERAL BAILOUT OF AIG HEARING BEFORETHE 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 VerDate 11-MAY-2000 14:10 Mar 23, 2011 Jkt 000000 PO 00000 Frm 00001 Fmt 6011 Sfmt 5011 C:\KATIES\DOCS\63136.TXT KATIE PsN: KATIE VerDate 11-MAY-2000 14:10 Mar 23, 2011 Jkt 000000 PO 00000 Frm 00002 Fmt 6011 Sfmt 5011 C:\KATIES\DOCS\63136.TXT KATIE PsN: KATIE T H E F E D E R A L B A I L O U T O F A I G VerDate 11-MAY-2000 14:10 Mar 23, 2011 Jkt 000000 PO 00000 Frm 00003 Fmt 6019 Sfmt 6019 C:\KATIES\DOCS\63136.TXT KATIE PsN: KATIE VerDate 11-MAY-2000 14:10 Mar 23, 2011 Jkt 000000 PO 00000 Frm 00004 Fmt 6019 Sfmt 6019 C:\KATIES\DOCS\63136.TXT KATIE PsN: KATIE THE FEDERAL BAILOUT OF AIG HEARING BEFORETHE 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 PDF WASHINGTON : 2011 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 VerDate 11-MAY-2000 14:10 Mar 23, 2011 Jkt 000000 PO 00000 Frm 00005 Fmt 5011 Sfmt 5011 C:\KATIES\DOCS\63136.TXT KATIE PsN: KATIE 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 (II) VerDate 11-MAY-2000 14:10 Mar 23, 2011 Jkt 000000 PO 00000 Frm 00006 Fmt 5904 Sfmt 5904 C:\KATIES\DOCS\63136.TXT KATIE PsN: KATIE 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 Treas- ury .................................................................................................................. 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 Treas- ury, prepared statement of........................................................................... 136 Towns, Chairman Edolphus, a Representative in Congress from the State of New York, prepared statement of ........................................................... 4 (III) VerDate 11-MAY-2000 14:10 Mar 23, 2011 Jkt 000000 PO 00000 Frm 00007 Fmt 5904 Sfmt 5904 C:\KATIES\DOCS\63136.TXT KATIE PsN: KATIE VerDate 11-MAY-2000 14:10 Mar 23, 2011 Jkt 000000 PO 00000 Frm 00008 Fmt 5904 Sfmt 5904 C:\KATIES\DOCS\63136.TXT KATIE PsN: KATIE 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; Bev- erly 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. (1) VerDate 11-MAY-2000 14:10 Mar 23, 2011 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\63136.TXT KATIE PsN: KATIE 2 On September 16, 2008, the Wall Street giant AIG faced imme- diate 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 re- fusal to name the counterparties. The New York Fed argued that disclosing these counterparties would somehow injure AIG. In fact, when the information was fi- nally 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. VerDate 11-MAY-2000 14:10 Mar 23, 2011 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\63136.TXT KATIE PsN: KATIE