AIG Hearings Run by the Gang That Couldn’t Shoot Straight

I watched Treasury Secretary Geithner on January 27th testify today before the House Committee on Oversight and Government Reform about the bailout of the insurance giant AIG and two aphorisms came to mind: No good deed goes unpunished and who promised you fair?

To put it politely… Geithner was skewered.

Congress acted like the surviving recipient of CPR who lives to sue his rescuer for breaking a few ribs in the process. Congress should be fixing a broken financial system, not posturing for posterity. It should have considered that Geithner, and a few others, saved the world’s financial system from a breakdown of unprecedented scale. They did not act perfectly, but they acted quickly, decisively, and effectively. With no oversight responsibilities for AIG, the Fed was a little busy dealing with:
• a run on a series of commercial financial institutions which ultimately failed (Wachovia, Washington Mutual, etc.),
• a systemic loss of confidence in the investment banking system and its four largest participants (in order of their problems: Lehman Bros, Merrill Lynch, Morgan Stanley, and Goldman Sachs),
• a systemic liquidity shortfall in the commercial paper market, and the money market funds, and
• the onset of the worst economy since the Great Depression.

Then, on Friday, September 12th, AIG came to the New York Fed, hat in hand, and announced that it was running out of cash and needed help. Mind you, AIG’s systems were so antiquated and inadequate to the informational needs of its global operations, that it did not know exactly how much cash it had on hand, did not know at what rate it was losing cash, did not know what exposure it had from the issuance of credit default swaps by its London operation, could not provide a list of its counterparties, nor its exposure to them, and had no one available who could answer these questions.

Over that weekend, then New York Fed President Geithner, while trying to find a private-market solution for AIG, was instrumental in:
• arranging the merger of Merrill Lynch with Bank of America,
• overseeing the failure of a private-market solution for Lehman Bros that resulted in its being required to file for bankruptcy in early Monday morning,
• substantially beefing up the Primary Dealer Credit Facility and the Term Securities Lending Facility by very broadly expanding the types of collateral that could be used under them, and
• arranging temporary exceptions to Section 23a of the Federal Reserve Act to allow insured depository institutions to provide liquidity to their affiliates struggling in the chaos.

The sleep-deprived team of regulators watched on Monday as AIG was downgraded by the credit rating agencies. The Dow fell some 500 points. The commercial paper market continued to fall apart.

The best estimate of the team working on the AIG problem was that the liquidity hole was $80 billion, not the $20 billion estimated by the company’s management. The firm’s exposure to the derivative and swap markets exceeded a trillion dollars. The firm was deeply interwoven into the world’s financial system.

At that point, Geithner and his team crafted an $85 billion secured loan that represented the first step in the rescue for AIG which was announced on the following day, September 16th.

If instead of Geithner, we citizens had Congress on the hot seat, here are the Q & A’s I would have liked to have seen:
• What government body oversaw a substantial reduction in the scope and power of the various entities regulating the financial industry?
• What government body created a regulatory scheme that incorporated such a disparate group of competing and uncoordinated regulators?
• What group of people preached that the free-market was self-regulating and safe while simultaneously accepting over $2 billion in campaign contributions from the financial industry in the last decade?

The answer to all three of these important questions is, of course, Congress.

On behalf of one citizen, Secretary Geithner, please accept my thanks for your role in crafting an extraordinary series of measures that took us on a path well away from Armageddon, even if it is a trail none of us would choose to be on.

One final aphorism comes to mind: don’t let the %$#@!@^ grind you down.