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AIG Wrath on Capitol Hill; Geithner, Bernanke Testify Before House Finance Committee
Aired March 24, 2009 - 11:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
(JOINED IN PROGRESS)
REP. SPENCER BACHUS (R-ALA), RANKING MEMBER: But what I'm saying...
TIMOTHY GEITHNER, U.S. SECRETARY OF TREASURY: ... (INAUDIBLE) contract.
BACHUS: ... Mr. Chairman, or Secretary, is that AIG's counterparties were paid 100 cents on the dollar.
GEITHNER: The people that had contractual obligations from AIG, (INAUDIBLE) bought an insurance protection product or a basic insurance product...
BACHUS: Well, we're not talking about...
GEITHNER: ... (INAUDIBLE) were paid...
BACHUS: ... insurance policies here. I'm talking about...
GEITHNER: No, but this is very important.
BACHUS: I'm talking about the foreign banks, Goldman Sachs. They were paid 100 cents on the dollar, were they not?
GEITHNER: Again, that was the purpose and result of...
BACHUS: Well, I'm talking about -- I'm just saying, they were paid 100 percent of what they were owed. Is that...
GEITHNER: AIG was able to meet its commitments, and met its commitments.
BACHUS: At 100 percent.
GEITHNER: It fully met its obligations, yes.
BACHUS: Sure. Fully met its obligations.
GEITHNER: Yes.
BACHUS: Well, my question to you -- and I'm not -- was there any discussion over a haircut or a 95 percent -- taking 95 percent or 90 percent as full payment?
GEITHNER: We explored at that time every possible means to reduce the drain on their resources...
BACHUS: Well...
GEITHNER: ... including what you referred to. But again, because we have no legal mechanism in place for dealing with this, like we deal with the banks, we did not have the ability to selectively impose losses on their counterparties...
BACHUS: You were 80 percent owners.
REP. BARNEY FRANK (D-MA), CHAIRMAN, FINANCIAL SERVICES COMMITTEE: No, I'm sorry. The gentleman has now exceeded the five minutes. As I said before, the last person speaking during the five minutes will complete a sentence, and we will move on.
Mr. Geithner, you want to complete the sentence?
GEITHNER: I forgot where I was in my sentence. But...
FRANK: Well, that's all right.
Then we will now go to Mr. Kanjorski. There are too many members here for those of us in the top row to abuse the five-minute privilege.
The gentleman from Pennsylvania?
REP. PAUL E. KANJORSKI (D), PENNSYLVANIA: Thank you very much, Mr. Chairman.
Mr. Geithner, it's interesting to note, just in the questioning of the gentleman from Alabama, how we're not sure of what happened when, and under what circumstances.
Have you understood yet that the American people's reaction last week, to a large extent, was due to the fact that they feel that they're boxed out of knowing what's really going on in this economic crisis, and they're not well-informed?
GEITHNER: Absolutely, congressman. I think that the American people are deeply frustrated and concerned and angry, and skeptical, frankly, that they understand what is happening and whether taxpayers' monies are being used wisely to deal with this.
I completely understand it. And they're completely reasonable reactions to the damage caused by this crisis.
KANJORSKI: Do you feel that, ultimately, the Federal Reserve and yourself will have to come up to Congress and ask for additional authority in a rescue two (ph) to replenish the capital of some of these banks after we get rid of the asset problem, and whether or not the activities of the last several weeks and this lack of information as to what the problem is and what the potential solutions are, will cause grave questions as to whether or not the Congress will authorize further rescue money? GEITHNER: Of course I understand that. I think there are -- it is clear that we're going to need to ask, and we will ask, for broader authority to deal with future AIGs. If that's in the of the country, we'll do that.
Now, in the president's budget, as you know, we put in a reserve fund against the contingency that, to solve this crisis adequately, we may need to come back to the Congress and ask for additional resources. But we haven't made that judgment yet.
But I completely understand the scale of skepticism and public opposition to the provision of additional resources.
But our responsibility is to recommend to the Congress what's necessary to help get the economy back on track. And if that requires more resources, it will be our obligation to come to you and make the case for that.
But we recognize it's going to be extraordinarily difficult, particularly in the wake of not just the events of the last two weeks, but the last nine months, frankly.
KANJORSKI: Well, that being the case, I assume that you recognize there's not an awful lot of sympathy up here to necessarily provide additional funds -- not going on the merits of whether the funds are necessary.
I, for one, am absolutely convinced that, for orderly process, we need additional funding, and probably will commit the second suicidal act, as we did back in September and October, and vote in favor of that funding. But it's not going to be an easy lift on behalf of the Congress.
In light of those facts, what are you designing, or what are you putting in place, so that we can adequately inform the American people as to what the real problems are and what the potential solutions to those problems are, so they are more partners in this act that we're going through?
GEITHNER: A very important question. Thanks for asking it.
Within the first weeks we took office, we put in place a set of clear commitments to put in the public domain the precise terms of all the financial contracts that my predecessor had entered into, and that we would enter in the future, that provide taxpayer assistance to financial institutions under the Emergency Economic Stabilization Act.
Because of that commitment, the American people will be able to see, as I said, the precise terms, for the first time, of those commitments.
In addition, we're going to require extensive reporting by any recipient of TARP assistance, to go into how they're going to use those resources, what that's going to do to their lending capacity, what's actually happening to lending. We've proposed very strong conditions on compensation, on dividends, a range of other things. But I completely agree that the American people deserve to see much higher standards for transparency and accountability over the use of these resources. And they are understandably skeptical that they're going to see enough benefit from these resources, because of -- in part because of -- the decisions you've seen made across the financial sector in the wake of Congress passing that exceptional authority back in September.
KANJORSKI: Would you call this putting together rules of engagement...
GEITHNER: I think...
KANJORSKI: ... and that in the future, as you move down this track, that the people you're dealing with, the companies you're bailing out, and also the American people will know the rules of the road...
GEITHNER: I think that's...
KANJORSKI: ... what we can expect...
GEITHNER: I think that's a very important thing. I mean, it's very important that the American people understand. We're going to devote these resources to things that are going to get credit flowing again, get interest rates down, improve the access for businesses and consumers to credit.
That is the central obligation and purpose of this authority.
And if you look at what we've done over the last several weeks, you can see we've moved quickly to put in place very substantial measures to help address the housing crisis. You're seeing the actions of the Fed and the Treasury together bring down interest rates, allow Americans to refinance, take advantage of lower interest rates.
You've seen us move to put in place very important new programs to help support small business lending, to get lending flowing again across the financial system as a whole. Those are very important things.
But as part of that, we need better clarity on the rules of the game going forward. I completely agree.
KANJORSKI: Thank you very much.
FRANK: The gentleman from New Jersey.
REP. SCOTT GARRETT (R), NEW JERSEY: Thank you, Mr. Chairman.
Mr. Chairman, I appreciate your opening comment with regard -- or opening response to the chairman -- with regard to your personal involvement with the bailout, saying that it was in consultation with the Treasury, but also, if I heard you correctly, also in consultation, but not with the approval, of the chairman of this committee, as well.
Is that correct?
BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE SYSTEM BOARD OF GOVERNORS: Secretary Paulson and I informed a large group of congressional leaders about the issue -- and also the president -- prior to the final signing of the agreement.
GARRETT: Did the chairman or anyone else ask the question at that time whether or not bonuses, or pay, or anything else would be considered at that point in time?
BERNANKE: I don't recall any discussion of bonuses or pay.
GARRETT: Thank you.
Mr. Geithner, I really do appreciate sincerely your opening comment, or one of your comments, with regard to Mr. Liddy, in saying that some of the comments about him are over the top. And some of the vitriolic comments coming out of this committee, as well, were certainly over the top.
I appreciate the fact very much that we are not going to get people like him to come in in circumstances like this. And I also appreciate the fact that, with all due respect, you're having a difficult time in the Treasury as far as filling all the spots that you need. I think it's difficult with that sort of action going on in Congress for you to be able to do that.
I think it's also difficult for all of you to get your job done in light of what was done in Congress last week, imposing impediments, if you will, in the legislation that we passed as far as accomplishing what you need to accomplish.
With all that said, I appreciate that.
Mr. Chairman, going back to your comments, you knew about this to some extent, and you elaborate on page five of your testimony, which I think is very insightful as far as the litany of your involvement and who you're looking at on the loss side, and what have you.
There was a filing with the SEC in the beginning of September at that time, which laid out some of that information. I presume both of you -- Mr. Geithner is nodding -- and Mr. Bernanke, I presume you knew as well, saying at that time, as far as the compensation packages that were out there, that would have to be considered.
I presume that one or both of you knew about that filing at that period of time, at least laying out the information? Yes or no.
BERNANKE: Congressman, I knew that there were general compensation packages throughout the company. I did not know -- I was not informed about the specific payments to AIG-FP.
GARRETT: OK. If you had that information, would that have been germane to your discussion... BERNANKE: It would have given us more time to talk, negotiate and look for options. But frankly, we still would have faced the same legal obstacles that we are currently facing.
GARRETT: Likewise, Mr. Geithner?
GEITHNER: Could I just say something? And this is very important.
GARRETT: Sure.
GEITHNER: A huge amount of information was in the public domain. We knew from the beginning that we had a mess on our hands -- a very, very complicated mess we were going to have to work through.
We were spending every minute, every molecule of oxygen, working to contain this big fire...
GARRETT: I appreciate that.
GEITHNER: ... (INAUDIBLE).
GARRETT: I only have five minutes. We're not going to...
GEITHNER: OK, but...
GARRETT: But let me finish the question.
GEITHNER: But on the specific question you asked...
FRANK: The chair -- the gentleman from New Jersey has the time. The member has the time. The gentleman from New Jersey.
GARRETT: If I can go around again, I'll let you elaborate on that. Although...
FRANK: In your dreams.
(LAUGHTER)
GARRETT: And I do dream about this stuff, oddly enough.
(LAUGHTER)
FRANK: Give the gentleman an additional 10 seconds, please.
(LAUGHTER)
UNIDENTIFIED MALE: (INAUDIBLE) time?
GARRETT: Yes. While some of was in the public domain, clearly, Congress was not thinking about this during that period of time.
Was it in either one of your consideration at that period of time that that information, while you were discussing it -- and I do appreciate the fact, how you were discussing it and weighing all the legal considerations, what have you -- was not conveyed to Congress in a formal manner, in one way, shape or form? Was that ever considered that you would discuss with Congress? Both of you.
BERNANKE: Congressman, one mechanism is congressional letters. And as you know, we received a large number of letters. We've responded in great detail, not often as quickly as we should have, and I apologize for that. But we have provided lots of information about governance, about compensation and other issues through that mechanism.
Also, we report on the financial issues...
GARRETT: Well, I don't -- to be candid with you -- I don't ever remember any letters from September -- between that time and now, or just a few weeks ago, discussing these particular issues as far as compensation and the bonuses, what have you.
Was it ever your consideration, either one of you, at that period of time, that if this information was discussed more publicly, that Congress may be hesitant about going forward with their voting in favor of the additional TARP monies? That was never a discussion, never an issue?
BERNANKE: As I said...
GARRETT: You got your (INAUDIBLE).
BERNANKE: ... I was not aware of the specific set of payments until the -- basically the same day, the 10th of March, I believe it was.
GARRETT: Right. But between that time forward, we have not been advised that -- and the committee in a formal manner. We have?
You're shaking your head "yes."
GEITHNER: (INAUDIBLE) from March 10th forward?
GARRETT: From March 10th -- I said September 10th? From March 10th, from March 10th we were.
Finally -- we only have about 15 seconds left -- with regard to the disorderly -- or the not disorderly -- but the orderly winding down of AIG, what can you tell us in about 15 seconds?
If there are no prospects of parties out there to pick up the good assets of AIG, what are the prospects of additional taxpayer dollars having to go into AIG to prop it up for a continued length or period of time while you continue to wind it down?
GEITHNER: It's going to depend very much on how the economy evolves and the asset markets evolve.
But contrary to what has been alleged, we have a very substantial and detailed plan for the unwinding, which involves selling off noncore assets and winding down the risky parts of the company.
GARRETT: I know the chairman will...
FRANK: The time has expired.
The gentlewoman from California.
I ask her for 15 seconds to respond.
The gentleman from New Jersey raised some questions about what I was told.
We were told -- not asked, but told -- that they were going to make this loan. I did, without a lot of time to react, raise one question, which was why there was not an effort to get foreign participation.
I was told by Mr. Paulson and Mr. Bernanke that they didn't think that was possible.
Two days later, we were asked by the same two gentlemen to do the TARP money. At that point, at that meeting, I did raise questions of compensation and continue to make that high priority.
The other thing I would say, I notice, again, it seems to be an unfortunate -- I was there at the same time as the ranking member. We were both there. We were both informed at the same time. We were not given any indication that our input was going to have any impact on what happened.
The gentlewoman from California, I appreciate it and I yield.
REP. MAXINE WATERS (D), CALIFORNIA: I would like to ask Mr. Geithner about the way that they have arranged to do their asset management for the new program that has been rolled out.
You mentioned that there are five fund managers to manage the program with Treasury and you set out the qualifications.
Who will these five fund managers be?
GEITHNER: We don't know yet. We have to see who applies and who...
WATERS: Is it possible Goldman Sachs could be one of them?
GEITHNER: It is possible that they are qualified. We would consider...
WATERS: Were they included in one of the managers when Mr. Paulson first rolled out the asset management program, before he pulled it back? Was Goldman Sachs one of those five?
GEITHNER: I don't know, but I'll be happy to go back and check. WATERS: I'll check it.
Let me tell you why I ask that. You hear a lot about the dissatisfaction about the bonuses, et cetera, but underneath all of this is a conversation about the linkages and the connections of the small group of Wall Street types that are making decisions.
And I just want to ask you, because you may be able to clear some of this up, it is true that Goldman Sachs received money from AIG. Is that right?
GEITHNER: That is true.
WATERS: How much was that?
GEITHNER: I don't have the -- I don't know exactly, but I'd be happy to make sure you...
WATERS: OK, we'll find out.
And, also, they received money from the TARP program, Goldman Sachs. Is that right?
GEITHNER: That's correct.
WATERS: OK. And Goldman Sachs is where Mr. Paulson really spent some time of his career. Is that right?
GEITHNER: Absolutely.
WATERS: Your CEO that you hired to work with you is from Goldman Sachs, also.
GEITHNER: My CEO?
WATERS: Whomever works for you. I don't want to -- I don't want to get the nuances to the point where we misunderstand each other.
GEITHNER: There are -- there are...
WATERS: Do you have your chief of staff -- is your chief of staff from Goldman Sachs?
GEITHNER: My chief of staff, who is a...
WATERS: Just tell me. I don't have much time.
GEITHNER: But, Congresswoman, my chief of staff did spend some time working...
WATERS: He worked for Goldman Sachs.
GEITHNER: ... a very brief period of time working in a task for Goldman Sachs, that's correct.
WATERS: OK, that's all I want to know. Then I want to know, was Goldman Sachs involved with the decision that was made that weekend before they came to the Congress...
GEITHNER: No.
WATERS: ... to ask for money on the sale of Bear Stearns?
GEITHNER: No.
WATERS: Was anybody from Goldman Sachs involved in that discussion that weekend?
GEITHNER: Let me go back on this. At the time when Bear Stearns was on the brink if default and the Federal Reserve then acted to try to avoid default, there were a range of institutions that considered buying and assuming the obligations of Bear Stearns.
WATERS: OK. I really wish I had time for you to go into it, but Goldman Sachs was involved in some way in that decision, based on whether or not they were considering the purchase themselves or they were advising about it. Is that correct?
GEITHNER: No, not in the decision and certainly not advising us.
WATERS: In some way.
GEITHNER: Certainly were not advising us, no.
WATERS: In some way, they were involved.
GEITHNER: Well, there were a whole range of institutions that Bear Stearns approached...
WATERS: Were they also involved in the decision to not support Lehman Brothers?
GEITHNER: No.
WATERS: In no way.
GEITHNER: No.
WATERS: All right.
GEITHNER: Those are decisions made by your government.
WATERS: I am just asking the question, because the talk is underneath, which you may not know about, is that this small group of decision-makers, at the center of it is Goldman Sachs and that's what's causing a lot of the distrust, because people are thinking or believing that Goldman Sachs, because of the connection, have had a lot to do with the decisions that are being made.
Now, on the big side, is there some reason why you only have to have five managers involved in this fund, with at least $500 million in private capital? This eliminates a lot of firms being involved and we believe that Goldman Sachs will again be one of those who will be the beneficiary.
GEITHNER: Well, as I said, we're going to run an open, competitive process so that the taxpayer of the United States enjoys the best type of expertise in managing these funds.
And there's some obvious practical concerns about why we can only have a limited number do it.
But can I just come back to your basic premise, Congresswoman? Of course, I'm aware of this concern. I think it is deeply unfair for the people who are part of these decisions to suggest that they were making judgments that, in their view, were not in the best interest of the American people.
But I understand that concern. I understand that concern.
FRANK: The gentleman from New York, Mr. King.
REP. PETER T. KING (R), NEW YORK: Thank you, Mr. Chairman.
I want to thank each of the gentlemen for your testimony today.
Secretary Geithner, I'd like to follow-up on some of the questions by Congressman Kanjorski.
I'd like to address the AIG bonus issue in the context of lessons learned and how what occurred with AIG would impact the toxic asset plan which you announced yesterday.
Of course, for that plan to succeed, there must be cooperation between the government and the private sector. There must be trust and there must be assurance that rules are in place and the rules won't be changed in the middle of the game.
Now, based on your experience with AIG, as painful as that may have been over the last several weeks and months, what can you do to assure the private sector that they do participate and they are profitable?
And for whatever reason, justified or not, there's public outcry when we see the type of hysteria and hyperbole and histrionic type of ventilating conspiracy theories and retaliatory legislation we saw last week that these private institutions will not have the profits confiscated, and I'm thinking now especially of marginal institutions who may be deciding whether or not to participate.
I also ask the question in the context of your testimony today and recent comments regarding excessive compensation. Now, if the government gets involved in setting compensation, that's going too far.
If you're setting standards, could that be too vague and would private institutions really have -- will they be protected from their compensation being subjected to ex post facto moralizing and judgment? With that, I...
GEITHNER: Multiple questions, let me just go quickly through them.
KING: Sure.
GEITHNER: I think it's...
KING: Take your time.
GEITHNER: ... absolutely right that we're not going to get through this financial crisis unless the system is willing to take risks, unless banks and private investors are able and willing to take risks again.
That does require some confidence and clarity about the rules of the game going forward. I think it's an important obligation we share with the Congress to try to make sure we're providing that level of confidence and clarity.
Also important, though, make sure that we reassure the American people that the taxpayers' money is not going to go to reward failure, to encourage excessive risk-taking in the future.
KING: If I could just interrupt for a second. All of us agree the AIG bonuses were wrong. But how do we protect against that without going too far?
GEITHNER: It's a difficult judgment. As the chairman said in response to a previous question, the choices we faced were very constrained by the fact that that these were legal contracts.
And we're a nation of laws and we have to be very careful about the circumstances in which we raise questions about the government intervening with respect to legally valid contracts.
But we do have an obligation now to go back and try to recoup those payments, and we're going to do that carefully and explore legal avenue in that context.
Now, looking forward, I do think it's appropriate for the country to put in place strong standards that govern compensation practice across the financial community as a whole, because as we've seen, those can have systemic consequences, create a more fragile and unstable system.
And you're right, it's a difficult balance. The government should not be setting detailed or prescribing detailed regulations to govern amounts of compensation and their distribution.
We have to hold to broad standards that, again, make sure that we're not encouraging short-term risk-taking at the expense of long- term stability.
And here's one other example. You want to make sure that the people responsible for running the checks and balances in these firms, for running risk management, for doing the audit process, those people, too, are compensated adequately to attract strong talent to run the checks and balances that our system depends on.
KING: What's the timeline as to when you expect to have these guidelines in place and your legacy asset plan goes forward?
GEITHNER: Our immediate priority is to lay out guidelines to apply the new legislative requirements on compensation that were passed as part of the American Recovery and Reinvestment Act.
But we are going to move quickly, we hope, to lay out broad standards that help govern compensation practices in the future beyond those that would apply to institutions that receive taxpayer assistance.
KING: On the legacy assets, toxic asset plan, do you intend to implement changes in mark-to-marketing?
GEITHNER: As you know, I believe, the SEC or the relevant legal authority has put out for comment some important new clarifications to the fair value accounting regime.
KING: And what would Treasury's opinion be on that?
GEITHNER: I want to be careful in how I respond to that, but I'll give you my initial reaction. It's that they're a constructive set of changes.
They provide a right balance between preserving confidence in the quality of public disclosure, which is very important to getting through this, but still address some of the complications of applying those provisions in a market like we're experiencing today.
KING: Thank you, Mr. Secretary.
FRANK: The gentlewoman from New York, Ms. Maloney?
REP. CAROLYN B. MALONEY (D), (NEW YORK): Thank you. And I thank all of the panelists.
I received a report from AIG that they presented to our government during this critical time, where they outlined the need for a bailout.
They claimed that they were America's largest insurance company and if they failed, the entire economy would fail. They more or less put a gun to our heads and said, "If you don't bail us out, the economy would fail."
I would put it another way. If we bail out firms every time someone says it, our economy will collapse. And since I have their detailed explanation, I would like to request from the Federal Reserve, Treasury and New York Fed the analysis that the government did that AIG needed to be saved.
I would like to study that, and also request the analysis that was made that Lehman should fail. I think the opportunity we have now is to study what happened so that we can make better decisions going forward.
So, Mr. Bernanke, does such a document exist and could we get -- receive copies of both the Lehman analysis and the AIG analysis from the government?
BERNANKE: We...
MALONEY: Surely we did not just take AIG's analysis...
(CROSSTALK)
BERNANKE: We certainly did not take AIG's analysis. We've done our own analysis. We have done our own analysis and had substantial discussions about the systemic risks associated with AIG. We will find what we have and -- and -- and -- and try to provide it for you.
On Lehman, we did not choose to let it fail. It failed because we could find no solution. But our strong preference would have been to avoid failure, because we -- we have seen the consequences of the failure.
MALONEY: And -- and likewise, AIG came back several times for more money, and at each point we could have put restrictions on executive compensation, or management, or a number of ways. Each time they came back, we could have analyzed the systemic risks more.
And I'd like to request the documentation that was done during those three periods that they came back for more money.
BERNANKE: We -- we did -- we did impose considerable restrictions on executive compensation and a process for setting it, and so did TARP when that became part of it.
The problem with AIG-FP bonuses was they were set by a contractual agreement prior to the government taking over the -- the firm.
MALONEY: Well, contracts can be changed. We've changed contracts all the time. Contracts are being renegotiated now with General Motors and with mortgage, housing and all kinds of places, so they can be changed.
But when we saw the counterparties, it included one firm that has publicly said that they -- they could have managed the default of AIG and been whole, so clearly, there was no systemic risk with that company and possibly with others. I'm sure you're aware of those public statements.
And also, when you looked at the counterparties, there were municipal governments. And do you consider municipal -- municipalities systemic risk?
BERNANKE: As I -- as I discussed in some detail in my testimony, the systemic risk goes well beyond specific counterparties. In the case of the -- of the company you're referring to, perhaps they were hedged, but then it means that some other party that had hedged them would have lost.
But more importantly than the specific losses associated with the counterparties would be the loss of confidence in the system as a whole and the likelihood that we would have seen a run on banks, given that markets would not know who was ultimately exposed to AIG.
MALONEY: And likewise, it had counterparties that were a number of foreign banks. Do you consider bailing out foreign banks systemic risk to the American economy?
BERNANKE: I think it's essential that the -- AIG meet its obligations. Otherwise, it would have created substantial problems, yes.
GEITHNER: Congresswoman, can I -- could I add something?
MALONEY: Yes.
GEITHNER: We did not act because AIG asked for assistance. We did not act to protect the individual counterparties from the consequences of their default. We did not act to help foreign banks.
We acted because, in our judgment, consequences of default for the American people would have been catastrophic, in ways that are very -- go directly to the value of their pension plan, their capacity to borrow.
If you -- if you -- if -- if you look at what happened across the source of the fall (ph), you can see concrete evidence of exactly what has happened in the wake of -- of a failure of AIG.
It's very important to understand this. I don't believe there is any plausible argument that AIG was not systemic then or that its failure today would not be systemic.
I think all the judgments that went into that very difficult judgment in September still apply today. And our obligation, the three of us here today, is to do what we believe is in the best interests of -- using the authority you've given us, to protect the American economy from the kind of catastrophic damage that could come with default by a major institution like this.
MALONEY: Reclaiming my time, basically, could the systemic risk have been contained at a much lower cost?
Mr. Bernanke, obviously...
FRANK: The chair was distracted. The gentlewoman can finish her sentence. Her time has expired.
The gentlewoman from Minnesota?
REP. MICHELE BACHMANN (R), MINNESOTA: Mr. Chairman, thank you for this opportunity.
These truly are extraordinary times in our financial service sector, since one year ago the Federal Reserve opened the Fed's discount window in the amount of 29 billion for Bear Stearns.
The American people are looking at the actions of both the Federal Reserve and the treasury secretary and they are wondering if their government is making an historic shift, jettisoning the free- market capitalism in favor of centralized government economic planning.
I wonder if, Mr. Secretary -- if you would comment on that.
GEITHNER: I do not believe that concern is justified. I understand why people would be worried about this. But what we're doing is using the authority that Congress gave us, authority that was designed to help protect the American economy from these kind of failures...
BACHMANN: Reclaiming my time, Mr. Secretary, what provision in the Constitution could you point to to give authority for the actions that have been taken by the Treasury since March of '08?
GEITHNER: Oh, well, the -- the Congress legislated in the Emergency Economic Stabilization Act a range of very important new authorities.
BACHMANN: Sir, in the Constitution. What -- what in the Constitution could you point to to -- to give authority to the Treasury for the extraordinary actions that have been taken?
GEITHNER: Every action that the Treasury and the Fed and the FDIC is -- is -- has been using authority granted by this body -- by this body, the Congress.
BACHMANN: And by -- in the Constitution, what could you point to?
GEITHNER: Under the laws of the land, of course.
BACHMANN: And if I -- if I could move to the Federal Reserve chair, if you could point to what provision in the Constitution have -- give authority to the Federal Reserve? This has been over $10 trillion that we're talking about.
BERNANKE: I don't know where $10 trillion comes from.
The Congress has the right to authorize funds, which is what they did in the -- in the TARP program. And they have given us -- in the 1930s, they gave the Federal Reserve the power for emergency lending as a means of addressing financial crises, which is what we've done. BACHMANN: And to the Federal Reserve chair, do you believe there are any limits on the authority that the Federal Reserve has taken since last March of '08?
BERNANKE: The loans we make have to be fully -- fully secured and collateralized. We have practical limits in terms of our ability to manage monetary policy, so there are, obviously, limits.
We have reported extensively to the Congress on all the actions that we've taken, and the actions we've taken have been solely and entirely for the purpose of protecting the American economy from the effects of a financial collapse.
BACHMANN: We've seen both China, Russia and Kazakhastan (sic) make calls for an international monetary -- a conversion to an international monetary standard as soon as the G-20.
And I'm wondering would you categorically renounce the United States moving away from the dollar and going to a global currency as suggested this morning by China and also by Russia, Mr. Secretary?
GEITHNER: I would, yes.
BACHMANN: You would categorically -- and the -- and the Federal Reserve chair?
BERNANKE: I would also.
BACHMANN: You would also.
Could you tell me why AIG was not put into receivership as opposed to conservatorship, Mr. Secretary?
GEITHNER: Again, no legal means existed under U.S. law to resolve AIG using the kind of powers available to the FDIC to resolve a bank.
Because of the absence of authority, your government was faced with no good options. And we chose the best option available at the time to help protect the economy from systemic damage.
If we had different authority, we would have different choices.
BACHMANN: And to the Federal Reserve chair, there's a -- the Federal Reserve has denied giving information the American people about the overnight loans that are made to the companies in terms of the bailout.
Bloomberg had initiated a lawsuit and the Federal Reserve has rejected -- 20 members of this Congress have written a letter to the Federal Reserve asking that the American people be given the information about which banks are made the loans, what the collateralization is.
Can you tell me why the Federal Reserve does not want the American people to know who these loans are made to on an overnight basis?
BERNANKE: First of all, it has nothing to do with the bailout. This is normal short-term lending done by the Federal Reserve to banks as has been done by central banks around the world for hundreds of years. The purpose is to provide short-term liquidity to these banks. Hundreds of banks, both large and small, come to the -- come to the discount window. They provide collateral for their loans. We have never lost a penny in this program.
BACHMANN: And, Mr. Chair, why would the American people be disadvantaged by knowing this information?
BERNANKE: They would not be disadvantaged necessarily. Well, they would in the following sense, that the concern is that if banks were revealed to be borrowing, and others were not, they might -- inference might be drawn that they were in weaker condition than they might, in fact, be.
There's a problem of what's called stigma, so that if -- if banks are perceived as being weaker, that they have to come to the Fed, then others may not wish to deal with them, and they would therefore not come to the Fed.
In fact, that was a problem we had at the beginning of this episode, that no one wanted to come borrow even though it was clear that the banking system needed to get liquidity from us.
So we have tried to make sure that -- that their information is protected so that they will, in fact, come and take the liquidity they need to help stabilize the banking system.
MALONEY: And, Mr. Secretary, as I understand it, approximately 90 to 95 percent in the new program that you've just announced yesterday of the funding would come from the taxpayers. Is that true?
Or perhaps the leveraging is a six to seven to one leveraging on the purchasing of the public-private partnership -- the toxic assets that are available?
When the returns come back to the American people, will the American people be receiving 90 to 95 percent of the benefit, or will it be another figure?
FRANK: The gentlewoman's time has expired.
And...
BACHMANN: Mr. Chair, could I have an answer from them?
FRANK: No. No. As I explained, members control the time. You cannot extend your time into somebody else's time and then get an answer in addition. As I said, the person speaking at the expiration of the time will be the last person speaking.
We cannot -- if members use their time to extend the discussion, then members lower down won't get a chance to answer (sic). When the time expires, the person speaking will be the last person speaking.
The gentlewoman from New York?
REP. NYDIA M. VELAZQUEZ (D), NEW YORK: Thank you, Mr. Chairman.
Chairman Bernanke, in September when you established the credit facility for AIG, what sort of specific restrictions did the Fed impose at that time on compensation to AIG management and employees?
BERNANKE: Well, President Dudley might be able to help me, but we imposed -- we -- first of all, we replaced the CEO and other top management. We proposed very tough restrictions on the pay to the top executives. In fact, three of the top executives are working for zero, or $1, a year right now.
Then when the TARP money came in, the -- the strictest terms of the TARP, compensation restrictions, were imposed. And in addition, the company agreed to go well beyond the legal requirements imposed by the TARP law.
So you know, throughout the top executive ranges, there have been very substantial restrictions on -- on compensation.
Bill, did you have anything else there?
WILLIAM DUDLEY, PRESIDENT, NEW YORK FEDERAL RESERVE: In addition to that, we have worked on the governance of -- of the compensation structure at AIG to -- to -- to basically firm it up so that they do a better job in terms of coordinating how compensation is done throughout the company.
AIG is a company with a very weak core and lots of big business units spread all over the world, and so compensation was not done on a consistent basis across the company, and we're working to improve that with -- with -- with -- with AIG.
VELAZQUEZ: So if you imposed all those restrictions, how can you explain the type of bonuses that were provided by AIG?
DUDLEY: Those restrictions, as had been the case in most of the TARP activities, for example, applied to the top management of the firm. These were not bonuses to the top management of the firm.
They were bonuses to individuals working in the AIG-FP division. They are highly compensated because they were using very complex financial derivatives and applying their -- their knowledge.
But -- and, again, as we've discussed, the contracts were signed prior to the -- the takeover. But I certainly agree. Let me be very clear, I think that the bonuses were disproportionate. And we are doing all we can to -- to claw them back and to reduce any further bonuses to that division.
VELAZQUEZ: So did you have any -- did you or any senior Fed official have discussions or e-mail communications regarding AIG's intention to make these bonuses not to the top level, but to the other employees that were given?
BERNANKE: As I mentioned, I was not personally informed about this specific set of payments until March the 10th. I then checked the various options that we had, legal and otherwise. And President Dudley communicated with CEO Liddy, as did the treasury secretary, and he wrote -- President Dudley wrote a letter expressing our deep concern about these bonuses.
VELAZQUEZ: Mr. Chairman, the Fed directly and through special purpose entities has extended AIG nearly $100 billion in loans. For the record, are you confident that AIG will fully pay back its loan to the Fed?
BERNANKE: I am very confident. First of all, half of the $100 billion is now no longer directly on the credit of AIG. It's secured by other types of securities, which we are assured will likely -- very likely pay us back and perhaps provide some profit.
The remainder $50 billion, half of it is directly owed by AIG, the other half is secured by senior preferred positions in their two -- two of their strongest subsidiary insurance companies.
VELAZQUEZ: Given everything that we have seen, in the event of a default by AIG on its government loans, the Fed will seize AIG assets. Given the massive lapses made in the area of executive compensation, I want to make sure that the Fed is planning for the worst-case scenario.
What plans have the Fed established to recover the funds lent to AIG in the event it defaults -- it defaults on its loan from the Fed?
BERNANKE: Well, as I've indicated, we have collateral for all of our loans, including for the $25 billion, for example, a senior lien essentially on all the assets of the company. So we are quite confident that we will be repaid.
VELAZQUEZ: And so you are confident. Do you have anything written to that matter that you can provide to this committee?
BERNANKE: We provide that information regularly by law. I think section 139 -- reports be given on all of our 13(3) lending, which provides in detail the arrangements that we have, and we'll provide -- we'll be happy to provide you more information, if you'd like to have it.
VELAZQUEZ: Thank you.
FRANK: The gentlewoman from Kansas, Ms. Jenkins?
REP. LYNN JENKINS (R), KANSAS: Thank you, Mr. Chair, and thank you all for your testimony today.
My constituents in Kansas have bailout fatigue. And just last night, I had a telephone town hall meeting where folks expressed a lot of frustration, especially regarding AIG spending their tax dollars on these bonuses and for sending some of their dollars to foreign counterparties.
So I'm just curious: At what point did the Federal Reserve or the Treasury Department realize that such a large sum of American tax dollars would be sent to foreign financial institutions? And is there a point at which European central banks or other foreign governments have or will step in to help?
BERNANKE: Well, as -- as we've discussed, it goes well beyond the counterparties. The critical issue was, was AIG going to default and create enormous chaos in the financial markets, or was it going to meet all of its obligations, including those to foreign counterparties?
I would point out that the Europeans have also saved a number of major financial institutions. And the issue of whether those institutions owed American companies money has not come up. So I think that there is a sense that we all have the obligation to address the problems of companies in our own jurisdictions.
In particular, the Europeans could appropriately point out that it was under U.S. regulation or lack of regulation and U.S. law that AIG failed. And in their sense, we do bear some responsibility.
But our -- our appropriate objective, I believe, was to avoid the default of the company, which would have led to very severe consequences in the financial markets.
JENKINS: All right. Thank you.
And then finally, very simply, how much more money is AIG going to need? And when can the American taxpayer expect to start recouping their money?
BERNANKE: Is there a timeframe that you would like to talk about, Bill?
DUDLEY: Well, obviously, you know, what happens to AIG going forward is going to depend on the state of the economy and the state of the financial system. And if we can get the financial system repaired, then the -- the outlook for the economy is going to -- to improve. And, therefore, the prospects for AIG are going to improve, as well.
So we can't say unconditionally that -- what sort of money AIG is going to need or not need in the future. But if we make the right steps in terms of fixing the financial system, we will improve the economy, and that will benefit AIG and protect the U.S. taxpayer.
JENKINS: OK, thank you.
I'd yield back the balance of my time.
FRANK: The gentleman from North Carolina.
REP. MELVIN WATT (D), NORTH CAROLINA: Thank you, Mr. Chairman.
Mr. Dudley, it seems to me that the other two gentlemen keep punting the questions on AIG to you, so I -- I want to ask you to provide, because I think the committee would benefit from having an analysis of what the upside potential of the 79 percent ownership in AIG and the various other ownership interests that we are taking in various other entities associated with AIG.
I -- I assume at some point we'll divest that and -- but it would be helpful to have a written analysis, I think, for the committee of what that upside potential is. I know it's, to some degree, speculative.
Mr. Geithner, Secretary Geithner -- and all of these questions that I'm asking are really forward-looking. I want to go to your proposal for resolution authority.
BETTY NGUYEN, CNN ANCHOR: We're going to continue to monitor this, but in the meantime, as mentioned a little bit earlier, the Treasure Department's push for new power is supposed to prevent another financial fiasco like AIG. That's why we've heard so much about it today. We want to bring in our Christine Romans from our "CNN Money Team."
And Christine, I want to ask you this, how exactly would the government have the power to do this?
CHRISTINE ROMANS, CNN BUSINESS CORRESPONDENT: Well, and I'll point out something, too, Betty. That just now, an hour and 45 minutes into this hearing is the first time that a congressman has actually started to get to the meat of this. They've been a lot of arguments about AIG and what's happened there.
What are these new powers that the administration wants? They want these powers so that you don't have an AIG again. A systematically important, as they call it, financial failure that could hurt everybody. That, suddenly, they're trying to clean up the mess after the fact.
So what is it? They would be able to provide loans, purchase debt of failing firms. They'd be able to transfer or sell assets of these failing firms. They'd be able to seize it, all together. They could renegotiate or dissolve executive pay agreements, a la the AIG bonus fiasco. They'd be able to ahead of time be able to do that, instead of having all these problems like they've had trying to figure out what to do about the AIG bonuses that the American people have been very clear they don't want to be paid.
And they would also be able to scrutinize the risky bets. The portfolios of derivatives that are on the books of, for example, the financial products division of AIG that ultimately were the big, big problem for what was once a big stable insurance company. What still is a big stable insurance company, except for this other part of it.
So that's what they want. They want these very broad, you know, powers to be able to do this. In this modern financial economy to be able to fix this mess.
Now, what would have happened if AIG were allowed to fail? This was a big chunk of what we were hearing in this hearing for more than an hour, really. And Ben Bernanke and Timothy Geithner really laying out what could have happened if AIG had not been backed up.
And listen to what the Fed chief said the consequences would have been of an AIG failure.
(BEGIN VIDEO CLIP)
BERNANKE: We at the Federal Reserve, working closely with the Treasury, made our decision to lend to AIG on September 16th of last year. It was an extraordinary time. Global financial markets were experiencing unprecedented strains and a worldwide loss of confidence.
Fannie Mae and Freddie Mac had been placed into conservatorship only two weeks earlier, and Lehman Brothers had filed for bankruptcy the day before.
(END VIDEO CLIP)
ROMANS: And the sound bite I had hoped to play was where he said, frankly, we would have had a 1930's-style financial meltdown. This would have been catastrophic for the global economy. It would be something that would have been very difficult to recover from. And that's what they were laying out, both he and the Treasury secretary.
The Treasury secretary saying, look, one in three American jobs are for companies, businesses, small businesses, that are insured by AIG. So this isn't something that just affected a big insurance company or affected the fat cats living in Fairfield, Connecticut. This is something he said was critical to the American people. And they kept drilling that home.
NGUYEN: But Christine, the Treasury secretary is asking for some really broad powers here. Talking about seizing a company, also constraints on risk-taking. When it comes to making those decisions, who sits on that board? Who makes the decisions as to what company they may or may not seize, if they're a risk, are too much for this company to be able to sustain? Who makes that decision?
ROMANS: Well, those powers do not exist right now, frankly. And what the Fed chief and the Treasury are saying is that those powers didn't exist and that's why AIG was so difficult. They were not able to step in ahead of time and unwind it in a way that wouldn't be so risky for the global economy.
What would that board look like? It's unclear. He's asking for Congress to give them, you know, the OK. To write the law so the Treasury Department would have these powers. Ultimately, it would rest with the Treasury secretary and the president's administration. Ultimately, that's who would have that power.
NGUYEN: All right, CNN's Christine Romans, breaking it down for us, as always.
We do appreciate it. Thank you, Christine.
ROMANS: Sure. NGUYEN: You know, we've all been watching as the stock market and 401(k) plans and retirement plans, all of that just brewing these past two weeks. But today, seeing a bit of a pull-back as the nation's top money men face some tough questions on Capitol Hill.
Susan Lisovicz is at the New York Stock Exchange with a chunk of the action on Wall Street.
Loved it yesterday, Susan. What? The market's up - the Dow up almost 500 points today?
SUSAN LISOVICZ, CNN CORRESPONDENT: That's right. That was yesterday.
NGUYEN: What a difference a day makes, right?
LISOVICZ: We're seeing a little bit of gravity. And you know, that's not surprising, Betty, given what we saw yesterday. The surge for the Dow, the Nasdaq, the S&P 500, each rallying at least six percent. It was actually the fifth best point gain ever for the Dow Industrials, and they've been on a hot streak.
So we're seeing a little bit of pull-back today. That's not surprising. What is encouraging is that we're not seeing stocks get crushed. That we're giving back so much of what we gained yesterday. That's encouraging.
And we're seeing bank stocks in particular get hit. Bank stocks have rallied enormously in the last few weeks, and we have seen a number of them double or triple in price.
Having said that, look at the prices. I'm looking at bank of America right now. It's under $8.00, and Citigroup is trading at $3.00. So they've rallied quite a bit. We're seeing a little bit of a pull-back right now - Betty.
NGUYEN: All right. Thank you so much for that, Susan.
You know, we're going to keep watching the AIG hearing on Capitol Hill, but we do want to remind you, the best political team on television will be right here for special coverage as President Obama explains his economic strategy in tonight's prime time news conference. You can watch it live at 7:45 Eastern right here on CNN.
(COMMERCIAL BREAK)
NGUYEN: Welcome back. You are you in the CNN NEWSROOM.
We do want to get you back to the AIG hearing on Capitol Hill where Treasury Secretary Timothy Geithner and Fed Chairman Ben Bernanke are testifying.
Let's take a listen.
FRANK: The gentleman from New York?
REP. GARY L. ACKERMAN (D), NEW YORK: Thank you, Mr. Chairman.
The -- the furor last week on the part of the public, the media and the Congress over the outrageous bonuses was very, very understandable.
But the truth of the matter is that bonuses did not create the problem. And even if all of those people gave back double the amount that they got in bonuses, and spent a week in the public pillory, which I presume they did, it wouldn't fix the problem.
The real problem is greed. And I -- and I think that with all of the roaring and chest-beating that we -- that we did and are continuing to do, we're not really fixing the problem here.
And I'm sorry to say that some of us are learning that we've heard a lot of otherwise innocent and decent people that just fulfilled their contractual obligations in different parts of some of -- some of this massive company having nothing to do with the real problem that took place in the financial products division -- and we probably owe them an apology and -- and maybe even more than that.
We owe them some kind of a -- a remedy to the damage that it looks like we've been engaging in. And we have to start looking at that, too.
The problem is -- is -- being greed assisted by innovation. And I think part of the solution has to be that we have to exert a little bit of common sense into the process, and I don't know that we can legislate that or you can enforce it, but certainly there are regulations and changes that we could be looking at.
And one of them should be expressed in a -- in a -- in a -- in a legal or regulatory way that says gimmicks are not financial products. And credit default swaps, although they might have some value somewhere, is really not insurance.
Looking forward, we should know that AIG is not the only company that used credit default swaps. How big is that market? How many other companies are out there? And are we looking at them?
And are we going to stop pretending that they're issuing insurance and get those products back into the range of reality rather than letting people think they're insured and then having to bail out all those other companies?
BERNANKE: Secretary Geithner can speak about this because he's done a lot of the work involved in trying to strengthen the CDS market.
The -- there was a particularly intense problem at AIG because they were essentially using these swaps to sell insurance against which they neither had capital nor did they have hedging, and so when -- when the insured event occurred, then there were enormous losses. So that was clearly a bad situation.
So one approach would be to make sure, from a regulatory perspective, that those who use CDS instruments have appropriate hedging or other protections to make sure that they can pay off.
The other approach, complementary approach, is to trade CDS not bilaterally over the counter but through some kind of central -- central counterparty approach.
ACKERMAN: Yeah, but we're -- we're -- we're in a crisis mode right now. You know, if -- if we discover that an airplane has a faulty flickem (ph), whatever that might be, you know, they -- they'll usually ground the whole fleet that has them, you know, because of obvious reasons.
Are we looking at doing that, these other companies with credit default swaps to a large extent, to see if we can ground them until we fix the mechanism?
BERNANKE: Well, that would have negative as well as positive effects, because some companies use the credit default swaps in order to hedge -- that is, to protect themselves -- as opposed to taking gambles, in the case of AIG.
ACKERMAN: I just want to suggest that we -- that we take a very, very close look at that, because there is -- there is a clear and present danger here that just like we're finding that there are many Madoffs, there are many AIGs out there.
And before we have to start bailing them all out, maybe we should ground some of them, too.
Yield back the balance of my time.
FRANK: Gentleman from California.
REP. ED ROYCE (R), CALIFORNIA: Thank you, Mr. Chairman.
On the front page of the Wall Street Journal, Mr. Bernanke, there's a headline titled "AIG's Rivals Blame Bailout for Tilting Insurance Game." Now, this is something that a number of insurance companies have -- have talked to us about.
I originally opposed the concept of bailouts. And one of the reasons I thought it was important to let AIG fail is -- is the fact that now that the government's behind them, they've got extra power in the market.
Anyway, the story says in the six months since the government stepped in, AIG at times has slashed insurance prices by more than 30 percent in some cases to fend off rivals and to keep or win contracts, according to public documents, insurance buyers, execs and others in the industry.
This tack has helped AIG insure customers ranging from the U.S. Olympic Committee and an Arizona airport to an Illinois nursing home and a Florida town government, as examples.
Now, I raise this issue for two reasons. First, the obvious competitive advantage AIG would gain within the market if they are, in fact, undercutting their competitors.
And second, if AIG is not offering actuarially sound rates on their insurance product -- products, it could result in more losses taken on down the road by the owners of AIG -- in other words, taxpayers, since we -- since taxpayers now own 80 percent of AIG.
Can you verify to the markets within which AIG is operating that AIG's subsidies will not have the full faith and credit of the federal government in the future?
And how confident are you that the domestic insurance subsidies that -- that have been put into the process so -- with respect to the subsidiaries of AIG are not using the systemically significant label within the market to undercut their competitors?
BERNANKE: Well, on the competitive side, I'm of two minds, because AIG is losing business because of the -- the taint and the other problems -- the -- the reputational problems.
And so you would expect to see them be more aggressive to try to retain some of that business. So it's not clear whether that's an undercutting or not.
I am more concerned about the possibility of -- of underpricing in the -- in the second sense that you mentioned. There are investigations of this issue going on, or have been undertaken. I believe that at least one or two of the state insurance regulators who testified before Congress last week suggested that they had looked into this and, as far as I understand, they have not found any substantial evidence of this underpricing.
I believe the GAO is also looking at the issue, and I'm not sure exactly what stage that investigation is, but we'll obviously be very interested in that outcome.
ROYCE: Well, how can we ensure down the road that AIG and other recipients of government assistance are not viewed as being backed by the federal government?
And this is one of the concerns I have about your overall plan, that at the end of the day we undermine market discipline because we -- we telegraph the message to the market that the government is behind these institutions and therefore as a consequence they're going to end up some day being overleveraged.
They're going to be able to borrow far more because the market discipline won't be there, at far less interest rates because they're going to be perceived basically as borrowing at near government rates.
And -- and you know, we saw this with Fannie Mae and Freddie Mac, that borrowed at very close to government rates and reported profits to their shareholders while the federal government held the risk that eventually materialized last September.
And -- and we saw them basically go into the business of arbitraging, borrowing at near government rates and then building up those portfolios, the 1.7 trillion, and -- and taking those risks that you couldn't have taken in the market. But they became the biggest player in the market because of the perceived government backing of the institutions.
That's what I worry about, in terms of the proposal that you're making today, in terms of the impact of converting other institutions basically into, shall we call them, government-sponsored enterprises in a way, because you would have the concept of the government behind them.
BERNANKE: Congressman, I -- I gave a speech, I believe, last week exactly on the issue of too big to fail, which I consider to be a...
