The hearing can be view on the committee stream or CSPAN3.

The witnesses in this panel are (Liddy, AIG’s CEO, comes later):

Panel one

  • Mr. Scott Polakoff, Acting Director, Office of Thrift Supervision
  • The Honorable Joel Ario, Insurance Commissioner, Pennsylvania Insurance Department, on behalf of the National Association of Insurance Commissioners
  • Ms. Orice M. Williams, Director, Financial Markets and Community Investment, Government Accountability Office
  • Mr. Rodney Clark, Managing Director, Insurance Ratings, Standard & Poor’s

Scott Polakoff: Rapid decline of AIG stemmed from liquidity problems in two business areas. CDS, typically based on mortgage loans. And securities lending. AIG stopped originating CDS in 2005. By that time, the company had $50 B on its books. AIG halted these activities while the housing market was still going stong. AIG protecting against losses for the least risky credit vehicles. There have been no underlying losses. Crisis resulted from liquidity calls. Two important lessons learned. CDS continue to be unregulated products. New regulations are essential. AIG story makes a compelling argument for a systemic risk regulator with authority to examine temporary liquidity problems.

Joel Ario: Hedge fund attached to large and stable insurance company. Financial products bet twice the value of AIG and faied to hedge the bets. It was to protect those leading financial institutions. We are doing this to protect our own financial system. AIG’s competitors claim AIG is underpricing in an attempt to maintain volume. Such disputes reflect insurers trying to protect profit margins in soft economy. We have reviewed charges on both sides. We have not seen any evidence of undercharging on either side. Insurance companies have the value they do because state level regulation requires reserves. Securities lending would not have caused a systemic risk. This does not compare to the credit default risk. The lending problem is solved. Need to identify and manage systemic risk. Insurance companies more likely recipients than creators of risk.

Orice Williams: GAO prohibited by law from auditing the Fed. Assistance given to AIG has given AIG an unfair competitive advantage. Fed and Treasury told us goal was to avoid systemic risk. The Fed has been monitoring AIG since September and Treasury has begun to more actively monitor AIG. AIG has mixed success in progress on its restucturing. Has not sold off business units in this market. Declines in the values of its assets. Potential impact of AIG on commercial property casualty market. Some of AIG’s competitors concerned that federal assistance has allowed AIG to offer coverage that is inadequate to the risk involved. While AIG may be pricing more aggressively, they have not seen indication that this pricing is out of line with prior practices. AIG insurances companies have received indirect benefit to the extent that AIG credit rating not downgraded.

Rodney Clark: Our ratings one tool to use in assessing the risk. Process by which we arrived at rating for AIG. S&P had a triple A rating, began to change in 2004, lowered rating 4 times. In May 2008 AA-, following losses. In August S&P announced that its view of credit losses would be around $8 billion, significantly more than M2M. In September put on negative credit watch. Lowered to A- in light of increasing credit losses. Since then AIG benefited from govt support, AIG has a six notch upgrade on rating–it would be B- without government support. Increased reputational risk for subsidiaries. AIG’s difficulties resulted from convergence of many things. Some say S&P downgraded too slow, others too fast. Our ratings not driven by market sentiment.

The hearing can be view on the committee stream or CSPAN3.

The witnesses in this panel are (Liddy, AIG’s CEO, comes later):

Panel one

  • Mr. Scott Polakoff, Acting Director, Office of Thrift Supervision 
  • The Honorable Joel Ario, Insurance Commissioner, Pennsylvania Insurance Department, on behalf of the National Association of Insurance Commissioners 
  • Ms. Orice M. Williams, Director, Financial Markets and Community Investment, Government Accountability Office
  • Mr. Rodney Clark, Managing Director, Insurance Ratings, Standard & Poor’s

Scott Polakoff: Rapid decline of AIG stemmed from liquidity problems in two business areas. CDS, typically based on mortgage loans. And securities lending. AIG stopped originating CDS in 2005. By that time, the company had $50 B on its books. AIG halted these activities while the housing market was still going stong. AIG protecting against losses for the least risky credit vehicles. There have been no underlying losses. Crisis resulted from liquidity calls. Two important lessons learned. CDS continue to be unregulated products. New regulations are essential. AIG story makes a compelling argument for a systemic risk regulator with authority to examine temporary liquidity problems.

Joel Ario: Hedge fund attached to large and stable insurance company. Financial products bet twice the value of AIG and faied to hedge the bets. It was to protect those leading financial institutions. We are doing this to protect our own financial system. AIG’s competitors claim AIG is underpricing in an attempt to maintain volume. Such disputes reflect insurers trying to protect profit margins in soft economy. We have reviewed charges on both sides. We have not seen any evidence of undercharging on either side. Insurance companies have the value they do because state level regulation requires reserves. Securities lending would not have caused a systemic risk. This does not compare to the credit default risk. The lending problem is solved. Need to identify and manage systemic risk. Insurance companies more likely recipients than creators of risk. 

Orice Williams: GAO prohibited by law from auditing the Fed. Assistance given to AIG has given AIG an unfair competitive advantage. Fed and Treasury told us goal was to avoid systemic risk. The Fed has been monitoring AIG since September and Treasury has begun to more actively monitor AIG. AIG has mixed success in progress on its restucturing. Has not sold off business units in this market. Declines in the values of its assets. Potential impact of AIG on commercial property casualty market. (more…)

emptywheel

emptywheel

Marcy Wheeler aka Emptywheel is an American journalist whose reporting specializes in security and civil liberties.