The bailout of American International Group (AIG) took center stage at hearings held by the House Committee on Oversight and Government Reform.

“In effect, the taxpayers were propping up the hollow shell of AIG by stuffing it with money, and the rest of Wall Street came by and looted the corpse,” Chairman Edolphus Towns, said in his opening remarks. “The circumstances surrounding the payments to the counterparties has created an air of suspicion and distrust among the American people, starting with the New York Fed’s initial refusal to name the counterparties.”

Treasury Secretary Timothy Geithner, who was president of the New York Federal Reserve at the time New York-based AIG was bailed out, defended his actions.

“The decision to rescue AIG was exceptionally difficult and enormously consequential,” Geithner testified. “At that time, our economy stood at the brink. We acted because the consequences of AIG failing at that time, in those circumstances, would have been catastrophic for our economy and for American families and businesses.”

Geithner’s predecessor as Treasury Secretary, Henry Paulson, testified that if AIG collapsed, it would have “buckled” the nation’s financial system. “AIG could not be effectively wound down,” Paulson said. “Unlike failed depository institutions which can be taken over by the FDIC with little or no harm to depositors, or the GSEs which were seamlessly placed into conservatorship by Treasury and the Federal Housing Finance Agency, there was—and is—no resolution authority available to wind down a failing institution like AIG. The only option is bankruptcy, a process that is simply not capable of protecting the millions of Americans whose finances are intertwined with AIG’s.”

Elias Habayeb, who was SVP and CFO of AIG during the bailout argued that the creation of special financing vehicles known as Maiden Lane III was necessary to repay AIG’s counterparties.

“Maiden Lane III was critical in helping AIG to eliminate most of its continued exposure to the significant mark-to-market losses and collateral calls on the swaps that were draining AIGs liquidity,” he said.

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