by Christina Lovato, University of New Mexico-Talk Radio News Service
“This is an extraordinary time and the government has been forced to take extraordinary measures. We will do what is necessary to stabilize the financial system, and with the help of Congress, develop the tools that we need to make our economy more resilient and our system more just,” said Treasury Secretary Timothy F. Geithner at a House Committee on Financial Services hearing.
Today, William Dudley, the President and Chief Executive Officer of the Federal Reserve Bank of New York along with Ben S. Bernanke, Chairman of the Board of Governors of the Federal Reserve System and Treasury Secretary Timothy F. Geithner testified in front of Congress and were hammered with questions regarding the American International Group, Inc. (AIG), a company at the center of the economic crisis.
Bernanke said that the Federal Reserve along with the Treasury made their decision to lend $85 billion to AIG in September 2008 because they agreed that AIG’s failure under the conditions then prevailing would have posed unacceptable risks for the global financial system and for the economy. “Global financial markets were experiencing unprecedented strains and a worldwide loss of confidence.... At that time, no federal entity could provide capital to stabilize AIG and no federal or state entity outside of a bankruptcy court could wind down AIG,” said Bernanke. When it came time to talk about AIG’s payout of retention bonuses to employees at AIG’s Financial Products Unit (FP), Bernanke stated, “It was highly inappropriate to pay out substantial bonuses to employees of the division that had been the primary source of AIG’s collapse.... I asked that the AIG-FP payments be stopped but was informed that they were mandated by contracts agreed to before the government’s intervention.”
Dudley stated that he believes AIG’s Chief Executive Officer, Edward Liddy, weighed a number of factors in when deciding not to attempt to prevent payment of retention awards owed to AIG-FP employees. Dudley said that the factors include “the likely negative effects of disruption in staffing at FP in managing its multi-billion dollar exposures, legal advice that the contracts were valid, meaning that breaking them would likely increase the amount of company funds ultimately paid to the covered employees and the negative consequences to AIG’s business that could result from the public abrogation of these contracts.”
Geithner said that the Treasury is working to promulgate rules and to develop a program under the original TARP legislation to review certain bonus awards already paid. Geithner stated, “The proposed resolution authority would allow the government to provide financial assistance to make loans to an institution, to purchase its obligations or assets, to assume or guarantee its liabilities, and purchase an equity interest.... This proposed legislation would fill a significant void in the current financial services regulatory structure in respect to non-bank financial institutions. Implementation would be modeled on the resolution authority that the FDIC has under current law with respect to banks.” Geithner concluded the hearing by saying, “This plan will work. This plan because of the authority provided by the Congress, not just of the Treasury, but the fed, gives us broad ability to do what you need to get through a financial crisis like this.”
Geithner, Bernanke & Dudley defend AIG
“This is an extraordinary time and the government has been forced to take extraordinary measures. We will do what is necessary to stabilize the financial system, and with the help of Congress, develop the tools that we need to make our economy more resilient and our system more just,” said Treasury Secretary Timothy F. Geithner at a House Committee on Financial Services hearing.
Today, William Dudley, the President and Chief Executive Officer of the Federal Reserve Bank of New York along with Ben S. Bernanke, Chairman of the Board of Governors of the Federal Reserve System and Treasury Secretary Timothy F. Geithner testified in front of Congress and were hammered with questions regarding the American International Group, Inc. (AIG), a company at the center of the economic crisis.
Bernanke said that the Federal Reserve along with the Treasury made their decision to lend $85 billion to AIG in September 2008 because they agreed that AIG’s failure under the conditions then prevailing would have posed unacceptable risks for the global financial system and for the economy. “Global financial markets were experiencing unprecedented strains and a worldwide loss of confidence.... At that time, no federal entity could provide capital to stabilize AIG and no federal or state entity outside of a bankruptcy court could wind down AIG,” said Bernanke. When it came time to talk about AIG’s payout of retention bonuses to employees at AIG’s Financial Products Unit (FP), Bernanke stated, “It was highly inappropriate to pay out substantial bonuses to employees of the division that had been the primary source of AIG’s collapse.... I asked that the AIG-FP payments be stopped but was informed that they were mandated by contracts agreed to before the government’s intervention.”
Dudley stated that he believes AIG’s Chief Executive Officer, Edward Liddy, weighed a number of factors in when deciding not to attempt to prevent payment of retention awards owed to AIG-FP employees. Dudley said that the factors include “the likely negative effects of disruption in staffing at FP in managing its multi-billion dollar exposures, legal advice that the contracts were valid, meaning that breaking them would likely increase the amount of company funds ultimately paid to the covered employees and the negative consequences to AIG’s business that could result from the public abrogation of these contracts.”
Geithner said that the Treasury is working to promulgate rules and to develop a program under the original TARP legislation to review certain bonus awards already paid. Geithner stated, “The proposed resolution authority would allow the government to provide financial assistance to make loans to an institution, to purchase its obligations or assets, to assume or guarantee its liabilities, and purchase an equity interest.... This proposed legislation would fill a significant void in the current financial services regulatory structure in respect to non-bank financial institutions. Implementation would be modeled on the resolution authority that the FDIC has under current law with respect to banks.” Geithner concluded the hearing by saying, “This plan will work. This plan because of the authority provided by the Congress, not just of the Treasury, but the fed, gives us broad ability to do what you need to get through a financial crisis like this.”