2018 1120 - YPFS - Lessons Learned Oral History Project Interview: Thomas Baxter - 19p
- 2018 1120 - YPFS - Lessons Learned Oral History Project Interview: Thomas Baxter --- [BonkNote] --- 19p
- (p17) - YPFS: Since AIG is an insurance company, what was the role of the insurance regulators and their interaction with the Fed during this time?
- Baxter: Part of the reason some people were not comfortable that the Trust owned 80% of AIG was because the investment could be subject to the jurisdiction of state insurance supervisors.
- We worked with multiple state insurance supervisors and their national organization, the National Association of Insurance Commissioners (NAIC).
- From the perspective of a federal supervisor, you are working with a collection of state insurance commissioners with very different financial support and very different capabilities.
- With that understood, the insurance commissioners have significant political power.
- That combination is one of the complicating factors for AIG and this became an issue with respect to the Trust.
- (p17) - Baxter: When we were establishing the Trust, one of the gating questions was, “Would the trust be subject to the jurisdiction of the insurance commissioners?”
- The insurance commissioners and I disagreed over this.
- From our perspective, the Trust was established for the benefit of the Treasury and the American people, essentially the federal fiscal power, and to have the Trust subject to the jurisdiction of the state insurance supervisors was quite a concern.
- The disagreement ended in sort of détente where the Trust would not try to challenge the jurisdiction of state insurance supervisors, but state insurance supervisors wouldn't formally try to assert their jurisdiction over the Trust.
- We would essentially stay in our respective corners.
- There is a series of letters7 that document this.
- ⇒ The insurance commissioners really didn't help the rescue of AIG, but they didn't harm it either.
- (p17) - Baxter: One of the fears was that if things had gone in another direction and AIG had to be wound up, each one of the state commissioners would have had its own proceedings.
- That was part of what created systemic risk for AIG, where there would be a fragmented series of resolutions and every insolvency official appointed by a commissioner would try and seize AIG assets.
- (p17) - Baxter: The other thing that I'll share with you is that we didn't feel that we could speak plainly about what multiple insolvency proceedings affecting an insurer would look like in 2008 and 2009.
- When you go back and look at the discussions of what caused financial problems at AIG, you see the story dominated by Financial Products, and that's in part because people didn't want to criticize the state insurance supervisors.
- (18) - Baxter: When you look at what happened with AIG’s securities borrowing program, in a nutshell, AIG's insurance companies held Treasury securities, which they lent out for cash.
- Then they used that cash to buy MBS, knowing that in the future they would have to sell the MBS to then redeem their Treasuries.
- No supervisor stepped up and said, "Wait a minute. You're making a play for yield, you're putting yourself at risk of being illiquid," which is exactly what happened.
- But we didn’t feel free to discuss this supervisory failure.
- We felt freer to talk about Financial Products.
- If you're a federal official and it looks like you're being critical of the state official, that can be a bad position to be in.
- (p18) - YPFS: If someone else held your position in a future crisis, what are a couple lessons that you learned through this crisis or things you wish you had at the time that others should be aware of?
- Baxter: I believe in the classic Bagehot dictum, that in a financial crisis you should lend freely, and it should be at a penalty rate and against good collateral.
- I also think that you need the right people in central banks to take the lead.
- You need people who understand markets and you need people who understand crises.
- You need a blend of doers and thinkers, and in the last crisis, we were fortunate enough to
have both of those skills.