The U.S. Federal Reserve refused to identify trading partners benefiting from a $180-billion taxpayer bailout of American International Group
The identity of those being helped by the massive AIG assistance package remained a mystery on Thursday despite efforts by irritated members of the Senate Banking Committee to get answers from Fed Vice Chairman Donald Kohn.
Kohn said revealing names risked jeopardizing AIG's continuing business but said the counterparties numbered in the millions and were spread all over the globe, including pension funds and U.S. households.
The goal was not to protect AIG or its counterparties, Kohl testified, but to prevent AIG's infection spreading. I wish with every fiber in my body that we didn't have to come in and do what we did.
Separately, Representative Paul Kanjorski told Reuters he had been informed that a large number of AIG's counterparties were European.
That's why we could not allow AIG to fail as we allowed Lehman (Brothers) to fail, because that would have precipitated the failure of the European banking system, said the Democrat from Pennsylvania who chairs the House insurance subcommittee.
Regulators failed to spot how much risk AIG was piling on in credit default swaps. By the time they understood, they had no choice but to pour in billions of public dollars, Kohn and other officials told the Senate panel.
Senators were outraged at the lack of detail about where the money had gone.
That we find ourselves in this situation at all is ... quite frankly, sickening, said Senator Christopher Dodd, the Democrat who chairs the committee. The lack of transparency and accountability in this process has been rather stunning.
Under a revised bailout deal announced on Monday, the amount of funds committed to help AIG increased to about $180 billion, although the insurer has not tapped it all and plans to pay back roughly $38 billion soon. The U.S. government holds about an 80 percent stake in the insurer.
It's not clear who we're rescuing -- whether it is whatever remains of AIG or its trading partners, said Dodd.
AIG's trading partners were not innocent victims here. They were sophisticated investors who took enormous, irresponsible risks with the blessing of AIG's triple-A rating, added Dodd.
AIG, which had written about $440 billion in credit default swaps, lost $61.7 billion in the fourth quarter, the biggest quarterly loss in corporate history.
The generosity of the bailout to AIG's counterparties was also criticized at Thursday's hearing.
Senator Bob Corker, a Republican from Tennessee, said he was surprised that AIG's counterparties were not only saved from being wiped out, but also took no discount on their securities. They've actually made out like bandits.
Lawmakers said they were running out of patience with regulators' refusal to identify AIG's counterparties.
The Fed and Treasury can be secretive for a while but not forever, said Richard Shelby, the top Republican on the banking committee.
But Kohn said the secrecy was necessary. We need AIG to be stable and continue in a stable condition. And I would be very concerned that if we started giving out the names of counterparties here, people would not want to do business with AIG, Kohn said.
Kohn admitted the Fed had pushed the boundaries of its authority in deciding to rescue AIG, but he said letting AIG fail would have been worse. I think we experienced something with the Lehman bankruptcy that suggested it would have been the most disorderly thing, he said.
The fact that a multitude of regulators missed the warning signs at AIG highlighted the need to establish a systemic risk regulator to monitor firms that are large and complex enough to destabilize the financial system, said Scott Polakoff, acting director of the Office of Thrift Supervision.
Where OTS fell short, as did others, was in the failure to recognize in time the extent of the liquidity risk to AIG of certain credit default swaps held in the portfolio of the company's financial products division.
That unit, although a small part of the global insurance giant's worldwide operations, racked up such heavy losses that it threatened the entire company's survival.
No one was minding the whole company and looking at how things interacted, and whether the whole company would, under some circumstances, put the financial system at risk, said Kohn.
(Additional reporting by Mark Felsenthal and Rachelle Younglai; Editing by Tim Dobbyn)