2009 0616 - GOV (House) - Systemic Risk and Insurance

  • Insurance and Systemic Risk)
    • [PDF-181p, VIDEO-C-SPAN] - <mp3, mp4> - M
    • approx. 21:00 - Melissa Bean - AIG's Problems weren't just in the Financial Products area, also was in the Securities Lending Department, Activities, products, 
    • approx. 29:00 - European Union - Peter Skinner
    • 1:26 - Patrick Baird (ACLI) 
    • 1:27 -  Michael Mcraith (NAIC) 
    • 1:27:30 - Michael Capuano (D-MA) 
    • Testimony - Michael T. McRaith - Systemic Risk and Insurance -16p
    • House - Committee on Financial Services - Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises
  • Insurance and Systemic Risk) - [PDF-181p,

  • (p5) - Ed Royce (R-CA) - Certainly, noting the failure of AIG, once the Nation’s largest insurer, is relevant, given the focus of today’s hearing.
  • (p7) - Melissa Bean (IL-D) - The collapse of AIG, the world’s largest insurer, has proven to be one of the most costly and dangerous corporate disasters in our Nation’s financial history.
  • (p29) - Mike CAPUANO (D-MA) - But everybody here thinks that there is <NO> one company that somehow provides systemic risk. That’s what I heard. I don’t think I heard anybody say anything different.
    • Has anybody here heard of the company AIG? I know it hasn’t been in the news lately.
  • (p29) - Michael MCRAITH (IL, NAIC) - But, Congressman, to be clear, AIG is kind of colloquially referred to as the world’s largest insurance company. But it is 71—

  • (p42) - Bill Posey (R-FL) - It is clear that if your testimony today was true, very few of you need any more useless bureaucratic regulation.
    • And who would have ever thought that, after the S&L crisis, so relatively shortly after the S&L crisis, with all the additional regulation that was put in place following the crisis, that we would again find ourselves in this hole of a financial crisis.
      • I mean, if regulation would have solved the problem, we wouldn’t be here today,  because brighter minds, creative lawmakers threw a bunch of regulation into the S&L crisis, and obviously it didn’t do anything.
      • And why we would think that we could be successful in trying to advance, out-think a creative risk-taker, kind of defies logic.
        • I think the answer is to hold people who harm people accountable.
        • You know, we pretty much, I think, agree that the cause of the crisis that we’re in now has been caused by greed. 
      • (p42) - And, I mean, if regulation would take care of it, the SEC’s 1,100 attorneys would have prosecuted Bernard Madoff 10 years ago when his scheme was exposed to them, and they refused to take any action.

  • (p43) - Melissa Bean (D-IL) - My question is for Mr. McRaith: If the Federal Government had not stepped in to provide AIG bail-out money, how prepared were the State regulators and the reserve funds to deal with the fall-out?
    • How would the States have come up with the $44 billion of Federal tax dollars that had gone to shore up AIG Life Insurance subsidiaries who took risky bets through their securities lending programs that, notably, were approved by the State commissioners?
    • And a follow-up question to that, what resources have been put in place subsequently by you and other State commissioners to oversee an insurance subsidiary’s securities lending program?
  • Mr. MCRAITH. Right. Thank you for that question, because securities lending has come up in other comments, as well.
    • It is important to understand that the problem—first of all, that the New York Department of Insurance was working to reduce the level of securities lending in the AIG subsidiaries before the crisis.
    • The crisis, remember, was a result of the—essentially, a collateral call on the AIG holding company, resulting from the credit default swaps.
      • This would not have been a problem, but for the CDS failure.
      • And it is also important to remember that the securities which were involved were AAA-rated securities at the time.
      • So it points to the need for better regulation of the credit default swap market. The—
  • Ms. BEAN. So where would the $44 billion have come from?
  • Mr. MCRAITH. Well, let me answer that.
    • I am going to get to that, but I want to—you also asked about reforms that have been undertaken.
    • We have increased capital requirements if companies are engaged in securities lending, enhanced reporting, and we are looking at how to revise our accounting standards, and that last improvement is ongoing.
    • In terms of $44 billion, it is important to understand that each insurer, of course, has significant capital require ments, to begin with.
    • Their assets cannot be used to satisfy the debts of the holding company.
    • Even if these subsidiaries—I think it’s an open question, also Congresswoman, whether if the—without the $44 billion, whether these companies would have actually become insolvent.
    • Many financial regulators will argue that they would not have been insolvent without the $44 billion, that they would have been okay.
    • However, if there had been a question of solvency, then the companies would have been placed into receivership.
    • And insurance is not like the FDIC, for example, where you need liquidity and cash  immediately. Insurance, in the guaranty fund system, essentially replaces the contract.
    • They don’t have to—and the coverage.
    • They don’t have to generate cash immediately, because, of course, not everyone dies—God forbid, everyone dies—on the same day, or everyone has a car accident on the same day.
    • And, for this reason, $44 billion would not have been needed immediately if, hypothetically, it would have been needed at all.
      • It would have been managed over a period of many years, if not decades.
      • And this is what happens—and does happen—through the course of State-based receiverships of insurance companies.
      • The State-based system would have been able to handle it, and it would have been, again, a—protected the consumers, the policyholders, first.

  • (p52) - Ms. BEAN. All right, thank you. My question for Mr. Skinner is, from the European perspective, how successful is the NAIC in implementing agreements reached with European counterparts?
  • Mr. SKINNER. To be honest, on reinsurance in particular, where we have had some perennial problems on collateral charges, not very successful at all.