2010 0701 - FCIC - 2008 Financial Crisis and Derivatives - Day 2 - Regulators Panel

  • 2010 0701 - FCIC - Hearing - 2008 Financial Crisis and Derivatives, Day 2, Regulators Panel - [PDF-313p, VIDEO-CSPAN]
    • Eric Dinallo (NY Insurance Regulator), Gary Gensler (CFTC), Clarence Lee (OTS)
    • 21:00 - How come we didn't see this? - Bill Thomas (FCIC), Gensler (CFTC)
    • 37:00- Dinallo, Born (FCIC) -
      • Born - Some have suggested that the real problem at AIG related to the Securities Lending program.
      • 41:00 - Dinallo - AIG Companies were fully solvent, wasn't the reason for the Bailout
      • Run on AIG Life, general economy, RMBS - Doubling down on real estate
      • Dinallo - Asset Liability Matching - Statutory Account vs Mark to Market
      • 44:00 -  Dinallo - Run, consumer lack of confidence in insurance products, liquidity problem
    • 53:00 - Wallison, Dinnallo - AIG company could do CDS because of AIG Life Rating,  Big Miss, Rating Company, 
    • 1:22 - Clarence Lee (Retired ), Keith Hennessey (FCIC)
      • Did they understand these risks? Cassano, etc
      • Probability, demands, liqudity,  understood the risks... low probability... willing to take them
      • 1:27 - Eric Dinallo - Collateral, no reserves, liquidity miscalculation, ratings downgrades
      • 1:31 - Keith Hennesey (FCIC) - AIG FP "got away" with it because they were part of the larger AIG Insurance Company.  Dinallo - Yes, I have written that. Dilapidated house example.  not really insurance
    • 1:33 - Hennessey - What would have happened if the Fed had not Bailed out AIG?
      • 1:35 - Dinallo - History, Geitner, Full blown Credit crisis, AIG Insurance Companies generally good.  AIG Asia Run - Singapore.... Could have undermined the 3rd Leg (Insurance)
    • 1:37 - Douglas J. Holtz-Eakin (FCIC) - How would this have affected Construction Bonds?
      • 1:37 - Dinallo - Problem for Insurance Companies is non-renewal of premiums.
    • 1:41 - Gensler - Mispriced.   Definition.  Underestimating and lack of preparation for bad things happening.  "underestimated risk" . Liqudity Risk, Correlation Risk, Tail Risk, Black Swan?  Credit Risk, "house of cards built on a housing bubble", confidence was shot, if I just had more time, nobody will hand you more chips,
    • 1:47 - {eter Wallison (FCIC) - Nobody saw this coming, not even Warren Buffet. 
    • 1:57 - Dinallo - 4 buckets - Derivatives are based on those 4 buckets... there is no 5th bucket. 36 to 1 leverage. no rules
    • 1:36 - Born/ Dinallo - Deregulation, Regulators, Capital Requirements, CFMA - Told Wall Street you don't have to reserve, unregulated, Regulation vs Enforcement, 
  • 2010 0701 - FCIC - Hearing - 2008 Financial Crisis and Derivatives, Day 2, Regulators Panel - [PDF-313p, VIDEO-CSPAN]

Eric Dinallo (NY Insurance Regulator) - Testimony - 20p

As early as July 2006, the New York Department and other state regulators were engaged in discussions about the securities lending program with AIG.

  • Those discussions at first related to the issue of risk-based capital and how the companies were reporting their securities lending program on their financial statements.
  •  It was in the course of those discussions that we learned about the details of AIG’s securities lending program.

Beginning in 2007...

  • ...we insisted that the program be wound down and...
  • Neither the NYSID nor any other state regulator issued a written directive to AIG to wind 
    down the securities lending business.

    • The lack of a directive is not unusual.
    • Also, in the case of securities lending, raising written (and thus public) questions about the program could cause counterparties to contractually end the loans (versus continuing to roll over the loans) and cause forced sales and losses.
  • From its peak of about $76 billion it had declined by$18 billion, or about 24 percent, to about $58 billion by September 12, 2008.
  • At that point, the crisis caused by Financial Products caused the equivalent of a run on
    the AIG securities lending program. Borrowers that had usually rolled over their
    positions from period to period began returning the borrowed securities and demanding
    their cash collateral. From September 12 to September 30, borrowers demanded a return
    of about $24 billion in cash.
    There are two essential points about AIG and its securities lending program. First,
    without the crisis caused by Financial Products, there is no reason to believe there would
    have been a run on the securities lending program.
  • Indeed, before September
    12, 2008, the parent company contributed slightly more than $5 billion to the reduction of
    the securities lending program.
  • Whatever the problems at securities lending, they would
    not have caused the crisis that brought down AIG
  • s. On July 21, 2008, New York issued Circular Letter
    16 to all companies doing business in New York which expressed Department concerns
    about security lending programs.
  • On September 22, 2008, the Department sent a Section 308 letter to all life insurance
    companies licensed in New York requiring them to submit information relating to
    security lending programs, financing arrangements, security impairment issues and other
    liquidity issues. (Section 308 is the provision of the NYS Insurance Law that gives the
    Department the authority to request additional information between periodic
  • Through our chairmanship of the National Association of Insurance Commissioners
    Statutory Accounting Practices Working Group, we also successfully worked to have the
    NAIC adopt increased disclosure rules for securities lending programs.
  • And it is worth noting that it was only
    AIG that was using securities lending in such a risky manner
  • <more>