This page has been archived and commenting is disabled.

Bernanke Responds To Issa, Claims Had Little To No Involvement In Actual AIG Bailout...So Who Did?

Tyler Durden's picture




 

With Bernanke at the FOMC meeting, one wonders where the Chairman finds all the time to deal with these assorted "distractions." In other news, Bernanke claims he was not directly involved in counterparty talks... So Geither was not, Paulson was not, Bernanke was not...Uh, did anyone at all authorize the biggest bailout in American history? Or was Goldman Sachs given a proxy exclusion on this one "very rare" occasion?

Full text of Bernanke submission, and selected answers:

1. In deciding on how FRBNY would pay AIG's CDS counterparties in return for tearing up their CDS contracts, did Federal Reserve officials take into consideration the financial health of the counterparties themselves?

Because of its concerns about the stability ofthe financial markets during this . period, the Federal Reserve was monitoring the financial condition of maj or banking and investment banking participants in the markets, which included many firms that were not counterparties to AIG's CDS and some that were. However, the overriding motivating factor in structuring the payments to the counterparties was to relieve AIG ofthe destabilizing drains on its liquidity caused by the requirement to continue to post collateral as required by the CDS contracts. All counterparties were treated the same for payment purposes. Whether the individual counterparties were in relatively sound financial condition or not was not a factor in the decision regarding the amount paid to the counterparties or whether concessions should be sought from them.

2. Did you ever personally discuss the payment of AIG's counterparties with employees or representatives of AIG's counterparties?

I was not directly involved in the negotiations with the counterparties. These negotiations were handled primarily by the staff of the FRBNY on behalf ofthe Federal Reserve. I participated in and supported the Board's final action to authorize lending to ML III for the purpose ofpurchasing the CDOs in order to remove an enormous obstacle to AIG's financial stability and thereby help prevent a disorderly failure of AIG during troubled economic times.

3. Were you ever personally involved in discussions about what AIG should disclose to the public or Congress about the payments to AIG's CDS counterparties?

I was not directly involved in the discussions with AIG related to this decision. I fully supported AIG's decision to release publicly in March 2009 the identities ofthe AIG's CDS counterparties that received payments from ML III.

4. Did you ever recuse yourself from involvement with decisions related to the disclosure of the payments to AIG's CDS counterparties and, if so, when?

I did not recuse myself from involvement with any decisions related to the disclosure ofpayments made to AIG's CDS counterparties because I have no financial or other interest that would have made a recusal necessary or appropriate. However, as explained above, I was not involved in discussions with AIG regarding counterparties or the disclosure matters you raise. As I have previously indicated, I supported AIG's decision to make public the identities of the counterparties, and those names were disclosed nearly a year ago. In addition, I was actively involved in Federal Reserve initiatives to expand disclosure of information relating to various Federal Reserve credit facilities, including the Monthly Report on Credit and Liquidity Programs and the Balance Sheet, and the weekly HA.l. release, which include detailed information on the status ofthe ML III credit facility. These and other publications of the Federal Reserve provide substantial information about all of our credit facilities, including the loans to AIG, ML III, and Maiden Lane II LLC, and the value of collateral supporting those loans.

5. What alternatives to the course FRBNY ultimately took in paying AIG's CDS counterparties were considered and why were they rejected?

The alternatives considered by the FRBNY are explained in the testimony of Thomas Baxter, Executive Vice President and General Counsel, FRBNY, before the Committee on Government Oversight and Reform.

As I and other Federal Reserve officials have made clear in congressional testimony and elsewhere, the situation faced by AIG and the Federal Reserve in the fall of 2008 with respect to AIG's CDS contracts pointedly demonstrates the urgent need for adoption of new resolution procedures for systemically important nonbank financial firms. Such a resolution authority would provide a wider range oftools for addressing the potential disorderly failure of a systemically significant firm, such as receivership or conservatorship powers, than are available to the Federal Reserve, which is limited to lending authority.

6. Did FRBNY consider assuming or guaranteeing AIG's obligations to its CDS counterparties and, if so, why was this course of action rejected?

See answer to Question 5 above.

7. Ifthe Federal Reserve felt it lacked the statutory authority to pursue alternatives to the course FRBNY ultimately took in paying AIG's CDS counterparties, why didn't the Federal Reserve seek additional authority from Congress?

As I and other Federal Reserve officials have made clear in congressional testimony and elsewhere, the situation faced by AIG and the Federal Reserve in the fall of2008 with respect to AIG's CDS contracts pointedly demonstrates the urgent need for adoption ofnew resolution procedures for systemically important nonbank financial firms. Such a resolution authority would provide a wider range oftools for addressing the potential disorderly failure ofa systemically significant firm, such as receivership or conservatorship powers, than are available to the Federal Reserve, which is limited to lending authority. Given the extremely compressed time frame in which a solution to the liquidity threat to AIG posed by its CDS had to be found, obtaining additional statutory authority for additional powers was not possible.

8. How did FRBNY determine the price it paid for the CDOs it purchased through Maiden Lane III ("ML3")?

As explained in Mr. Baxter's testimony, ML III purchased the multi-sector CDOs underlying AIG's CDS at their current market value (approximately $29 billion), which represented a significant discount to their par value ($62 billion). Before agreeing to the transaction, the Federal Reserve consulted independent financial advisors to assess the value ofthe underlying CDOs and the expectation that the value ofthe CDOs would be recovered. The advisors believed that the cash flow and returns on the CDOs would be sufficient, even under highly stressed conditions, to fully repay the Federal Reserve's loan to ML III. Under the terms ofthe agreement negotiated with AIG, the Federal Reserve will also receive two-thirds ofany profits received on the CDOs after the Federal Reserve's loan and AIG's subordinated equity position are repaid in fulL

9. Do you believe that FRBNY paid a fair price for the CDOs it purchased through ML3 and, if so, what basis do you support that belief?

See answer to Question 8 above.

10. Are you aware of any attempts by Federal Reserve officials, staff or outside counsel to prevent public disclosure of information about the payment of AIG's CDS counterparties by seeking special procedures from the Securities and Exchange Commission ("SEC")?

I was not involved in discussions with the SEC about any disclosure issues involving AIG. I understand that the Federal Reserve staff and its outside advisors supported AIG's initial application to the SEC to have the names of the CDS counterparties that sold CDOs to ML III remain confidential in public disclosures. I understand that the material sought to be kept confidential was handled under the special procedures created by the SEC for handling certain types of information for which confidential treatment has been requested. Under these procedures, the SEC keeps the confidential information in a separate safe so that the confidential version ofthe relevant document is not mistakenly treated as the public version. The procedures do not relate to the SEC's decision with regard to whether the information at issue warrants confidentiality under applicable standards.

Three months later AIG changed its view and decided to reveal the counterparty names. The Federal Reserve supported that decision. The counterparty names were disclosed nearly one year ago. I also understand that AIG has continued to ask the SEC to keep confidential certain commercially sensitive information, including CUSIP numbers and tranche names, that would identify the individual CD Os that ML III acquired from the counterparties. The Federal Reserve has supported this request. The FRBNY and its advisors believed that public disclosure ofthe identifying details concerning individual securities in ML Ill's portfolio, including to market participants, would undercut the ability of ML III to sell those assets for a maximum return to the detriment of taxpayers. In May 2009, the SEC independently concluded that this commercially sensitive information need not be disclosed. All other material information concerning the ML III transaction has been disclosed in AIG public filings with the SEC.

11. Are you aware of any attempts by Federal Reserve officials, staff or outside counsel to prevent Congress from obtaining information about the payment of AIG's CDS counterparties?

The Federal Reserve has made a tremendous amount of information about its actions with respect to AIG available to Congress in testimony, correspondence, and reports as well as to the public on the Federal Reserve website. I strongly support the goal oftransparency with respect to the Federal Reserve's actions in connection with the creation ofthe ML III credit facility and the other actions we have taken regarding AIG. To further this goal, I have welcomed a full review by the Government Accountability Office of all aspects of our involvement in the extension ofcredit to AIG.

12. Are you aware of any attempt by Federal Reserve officials, staff or outside counsel to prevent public disclosure, either through the SEC or Congress, of any AIG employee compensation packages?

See answer to Question 11.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Wed, 01/27/2010 - 11:15 | 207583 koaj
koaj's picture

so bernanke is calling Jim Bunning a liar?

i hope a retiring senator can "leak" an email

Wed, 01/27/2010 - 14:00 | 207878 TraderMark
TraderMark's picture

That's been my question as well

All these people are so "irreplacable" yet somehow none of them actually make any decisions.  Not only the final decision but they are "barely involved" with the decision at all.  So why are they so important again?

As to who was behind this all it was clearly Bernice in accounting.  Bring her into the hearings! 

Wed, 01/27/2010 - 11:20 | 207594 Commander Cody
Commander Cody's picture

Ok, I get it now.  These a**holes were not directly involved in the discussions with AIG or the banks.  However, whether or not they actually participated in the discussions the fact  remains that those discussions did not occur without the policy decisions that only they could make because of the significance of the bailout.  Also, I do not believe that Bernanke and Geithner did not talk directly with the bankster end of the deal.  In the end, one of their secretarys will go to jail because she or he authorized full payment and demanded secrecy.

Wed, 01/27/2010 - 11:28 | 207606 Jim in MN
Jim in MN's picture

 

Paging Rose Mary Woods....please report to the Congressional School for Scandalous Secretaries to instruct today's Executive Assistants on just what a secretary might know, and when he or she might know it....

Wed, 01/27/2010 - 17:43 | 208298 DaveyJones
DaveyJones's picture

They're telling the truth. You see, on capitol hill, "directly involved" does not include telephone, fax, email, text or twitter. In fact, "directly invloved" only applies when you are no more than five feet from the other party, standing in the same room and naked. Unless it's your paige. In that case you are never "directly involved."       

Wed, 01/27/2010 - 11:29 | 207609 Astute Investor
Astute Investor's picture

This is just the usual obfuscation e.g. "what is the definition of is" and other such missives.  It was all just an act of God.

Years from now, they can all respond like Bill Murray in "Stripes" -

"Convicted?  No, never CONVICTED...."

Wed, 01/27/2010 - 11:35 | 207620 mr brincq
mr brincq's picture

so this is was the largest insurance company in the world.....so Geithner was not involved  and Bernanke was also not involved......WTF.....who was in charge then? probably the Trainee....

Wed, 01/27/2010 - 11:38 | 207627 Assetman
Assetman's picture

Where does the buck stop with these guys?

Duck accountability.  Duck responsibility.  Duck tranparency.

That's 3 ducks in a row.  How nifty.  It must be a duck.

You can get reappointed for another 4 years Ben, but no one trusts you... and the reasons will continue to pour out.

I sense a lot of Senators losing their comfy seats over this... and it couldn't come soon enough. 

Wed, 01/27/2010 - 11:50 | 207643 mr brincq
mr brincq's picture

for the market it does not matter....the news follows the market....and that is down....good luck trading

Thu, 01/28/2010 - 01:35 | 208829 Problem Is
Problem Is's picture

Question 6:

See answer to Question 5 above.

Okay. Question 5:

See answer to Question 6 below.

That is what the definition of IS is.

With a slurring half New Jersey accent rather than a blow job Arkansas drawl...

Wed, 01/27/2010 - 11:51 | 207651 BaronG
BaronG's picture

This reminds me of little kids just passing the blame. Yes it ultimately matters who made the decisions. But Tim and Ben are the heads of their organizations and are ultimately responsible for decisions made by those within each. How could they not be involved, considering the implications and current situation. If they didn't have the foresight to see how big this would get, well, it just adds to the LONG list of reasons why they should be outed. 

Ha, look at me trying to apply logic and standards to this debacle...whoops

Wed, 01/27/2010 - 11:55 | 207667 deadhead
deadhead's picture

looks like when we parse this out, it comes down to the definition of "directly involved". 

As assetman points out above, the trust has been violated and destroyed.  At least the Fed is now consistent with the US gov't about a foundation now built on lies, fraud, dishonesty, deception and, well, pull out a thesaurus and ad infinitum....

Wed, 01/27/2010 - 12:00 | 207683 Anonymous
Anonymous's picture

The Obambi admin. is now using the support for Bernanke from the US Chamber of Commerce, TIME magazine and Jim Cramer in an attempt to fault the republican's for not supporting Bernanke.

A senior administration official tells POLITICO's Mike Allen: "It's amazing that Senate [Republicans] can barely muster a majority for a Republican who was named Time's 'Man of the Year' and who served in the Bush White House, was appointed to his current job by President George W. Bush and has the full support of the US Chamber of Commerce and Main Street American business. And their main complaint is that he saved the world from what Jim Cramer has called the 'financial stone age.' Is the minority leader Ron Paul? Someone's learned the wrong lesson from the MA race and it's not President Obama."

http://www.politico.com/politico44/perm/0110/bristling_over_bernanke_d16...

Thu, 01/28/2010 - 01:39 | 208832 Problem Is
Problem Is's picture

I like to call Obama... Barry Hoover.

Feels like 1930 to me...

Wed, 01/27/2010 - 12:01 | 207685 Anonymous
Anonymous's picture

Ummm....so if that is the case, then I guess Osama Bin Laden was not involved in the planning of the 9/11 attack either??

Wed, 01/27/2010 - 16:16 | 208167 Anonymous
Anonymous's picture

actually he was not....tim osman - aka osama bin laden -
and former baby bush business partner - was a stage
prop for usa intelligence to destroy the wtc in a
controlled demolition of 3 buildings using military
grade nanothermite....

www.ae911truth.org

please learn the facts instead of the newsfaking....

Wed, 01/27/2010 - 12:05 | 207698 Anonymous
Anonymous's picture

This trial has the Fed making the US looking like a fucking dog chasing his tail. Until this administration takes some action, This is nothing but a fucking Horse and Monkey show at the Zoo. ZH, I'm surprised you are falling for this Bullshit. It's all a fucking stageshow. The fed will be triumphant.

Wed, 01/27/2010 - 12:08 | 207709 Anonymous
Anonymous's picture

as others have noted the subtle definitions and contrived language is either evidence of substantive lying or my previous theory - perhaps best dubbed invasion of the body snatchers - is correct....namely that cia or other plutocratic powers assumed the levers of power without our knowledge and authorized transactions and decisions without benhole's official action.....

catherine austin fitts described such scenarios when she was under-secretary which may well apply here....

either way it is bad and sufficient cause to fire benhole....he does not have control or knowledge of what is going on in his own organization or he is giving its powers to other invisible people....

all the more reason to burn the fed down....

Wed, 01/27/2010 - 12:09 | 207710 Anonymous
Anonymous's picture

Unfortunately for our markets and indeed for our future, the world is beginning to see that our fiscal and monetary policies are being managed by the Three Stooges representing a veritable Den of Thieves. Next up? Blackshirts, perhaps, to quell the citizenry wielding pitchforks.

Wed, 01/27/2010 - 13:21 | 207774 bugs_
bugs_'s picture

There is blood in the water and everyone knows it.

This goes the distance and will bring down more

than one person.

Wed, 01/27/2010 - 13:26 | 207789 Anonymous
Anonymous's picture

This "Nobody is Guilty" is so BANANA REPUBLIC, we beat Venezuela big time.

"El Presidente says no one is guilty... nothing no see here, move on peps.."

Viva La Banana Republic!!

Wed, 01/27/2010 - 13:35 | 207810 Anonymous
Anonymous's picture

Curious as to why George Bush is being brought before the committee, as he appointed both Paulson and Geithner and they were the final decision makers on the bail out as well as Bernancke, who signed off on the deal. Or Cheney for that matter.

I guess no one believes Bush paid attention to anything, but some Pubs claim he is the best President ever.

Its been posted on ZH before, but its normal for decision details to be left to underlings. Anyone who believes this alone "proves" a conspiracy is a fool. Show me some real proof money went to the decision makers and I'll buy the rope.

As to transparency, seems that is a red herring. The Fed does disclose. The spend a lot of time and money disclosing. And the Congress and the President ignore what the Fed wrote in the past. So what more do they want now? Pls recognize incompetents grandstanding for what it is and for what they are. The Federal Reserve system in its modern form has been around for a long time. Only now do they think there is a problem?

Issa's a partisan buffoon and the demo guy not a whole lot better.

Last, paying 27 for par of 64--42 cents on the dollar for liquidity distressed assets-- may still work out OK for the Fed. With that "protection" built in to the proposed deal, its seems to me a reasonable decision not to quibble too much about the very complicated details. (Still, they cld and probably shld have negotiated better deals with the counterparties).

So if the Fed can realize 50% of par that's a 20% profit and I understand some other payments are also built in.

If the Fed makes $ off the AIG deal, will all the naysayers personally apologize for torching the guys dealing with the fire?

LDuffet

Wed, 01/27/2010 - 15:20 | 208001 Assetman
Assetman's picture

Last, paying 27 for par of 64--42 cents on the dollar for liquidity distressed assets-- may still work out OK for the Fed. With that "protection" built in to the proposed deal, its seems to me a reasonable decision not to quibble too much about the very complicated details. (Still, they cld and probably shld have negotiated better deals with the counterparties).

Interesting post.  In the context of enlightening the rest of us, could you please step back and explain the math on how the government is effectively paying 42 cents on the dollar for distressed assets?

I'm not agreeing or disagreeing here, I'm just trying to get a better understanding.

And I think very few will agree with you on the "red herring", tranparency issue, I'm afriad.  The Fed I'm sure spends a lot of time disclosing.  At issue is how relevant (and potentially damaging) is the information they are trying NOT to disclose.

I think biggest issue I see is that somewhere in the process, there was a decision NOT to negotiate with the counterparties and work at a level of par-- when negotiating for a better deal was clearly possible.  Was this looked as a price concession for expediency?  Perhaps.

Wed, 01/27/2010 - 13:37 | 207818 colonial
colonial's picture

Apparently no one knew anything.  The conclusion is simple.  Either Bernanke and Geithner were conspirators to protect banks over citizens.  Or they were, as they claim, unaware.  Which is better incompetence or corruption?  Both should resign to spend more time with their families. 

As I'm writing this I'm watching the ridiculous hearing at House Oversight/Reform.  Geithner is being careful to use dates as a means to protect himself. 

It begs a larger question. 

What was the date that the SEC voted to allow unprecedented leverage for the major brokerage houses? 

To the best of my knowledge it pre-dates the crisis.  At that point in time Bernanke and Geithner should have realized the danger excessive systemic leverage would cause.  They did not need to hide behind staffs, or regulatory black holes on this issue. 

Members and Senators should ask both Bernanke and Geithner why the Fed took no action when it became aware that the SEC allowed firms that were clearly too big to fail, (the Greenspan put,) to leverage their balance sheets in this manner.  It is answer that should cost them both their jobs. 

Wed, 01/27/2010 - 15:02 | 207930 Commander Cody
Commander Cody's picture

What was the date that the SEC voted to allow unprecedented leverage for the major brokerage houses? 

Firstly, while the SEC does vote (a Commission of five), they do so to ensure concurrence on the efficacy of their regulations.  They issue regulations based on legislation and, supposedly, enforce them.

Secondly, Congress knows full well why, when and how banks came to be casinos.  It was the repeal of the Glass-Steagal Act in 1991.  Supported by both houses of Congress and signed by President Clinton.

Thirdly, investment houses, which used to be separate from any related commercial banking units under Glass-Steagal did not have the restraints placed on them as did the commercials.  Now, it is one big free-for-all with the US taxpayer as the backstop of last resort.

Wed, 01/27/2010 - 14:08 | 207899 defender
defender's picture

If you notice, Bernanke never really did answer number 11.  All he said is that they provided large amounts of information, not if they withheld any.

Wed, 01/27/2010 - 16:41 | 208204 Anonymous
Anonymous's picture

It wasn't you,

It wasn't me,

Must be that fellow

Behind the tree.

Wed, 01/27/2010 - 19:48 | 208444 carbonmutant
carbonmutant's picture

Someone "Magically" acquired vast amounts of authority...

Wed, 01/27/2010 - 20:51 | 208499 honeyeater
honeyeater's picture

John Mack taking you through the week after Leeman went bankrupt and Merrill Lynch was bought by Bank of America.

"So we get a call from Tin Geithner, Head of the New York Fed, Friday afternoon, sometime around five o'clock four thirty and says, "John can you come down to the Fed, we are going to have a meeting...."

John Mack on Saving Morgan Stanley, Inside the Bunker

http://www.youtube.com/watch?v=R9sQtmPAYO0

"So my secretary walks in and says, "John Hank Paulson is on the phone." So for some reason I got up from my desk, I walked over to my couch and I picked up the phone. Hank said "John, I'm on here with Ben Benanke and Tim Geithner . We want to talk to you."

I said, "Well Hank, I would like to put my General Counsel on the phone...."

 

 

Thu, 01/28/2010 - 01:44 | 208796 tom a taxpayer
tom a taxpayer's picture

 

Like mob bosses, Paulson and Bernanke made the decisions and gave the orders. The underlings at the Fed, FRBNY, and Treasury carried out the orders. 

Intially, the government was hesitant to bailout AIG because of public anger about the series of Wall Street bailouts beginning with Bear Stearns. But AIG counterparties warned the Fed, FRBNY, and Treasury about the systematic risk of an AIG failure...systematic risk meaning cascading failures and ruin facing AIG counterparties (a.k.a. systematic crooks of Wall Street and big banks). 

So, Paulson and Bernanke personally decided to bailout AIG counterparties by bailing out AIG. Of course, Paulson and Bernanke  do not handle the details of the payments, haggling with the Wall Street crooks over a few billions dollars here and there. Hank and Ben's culpability is far greater than a lowly bag man. Paulson and Bernanke are the Grand Architects of the payments to the counterparties.

The Fed approved the 100% bailout of AIG counterparties. Ben, as Chairman of the Fed, is 100% personally responsible for the 100% bailout of AIG counterparties. 

 

Do NOT follow this link or you will be banned from the site!