AIG - Securities Lending - Dinallo

  • GOV (House) - The Causes and Effects of the AIG Bailout- AIG Bailout Oversight Hearing - [PDF-171p,  VIDEO-CSPAN]
  • 2009 0305 - GOV (Senate) - American International Group: Examining What Went Wrong, Government Intervention, And Implications for Future Regulation - aka Government Intervention and Regulation of AIG - [PDF-72pCSPAN, - Video-Senate-Error
  • 2010 0701 - FCIC Hearing - 2008 Financial Crisis and Derivatives, Day 2, Regulators Panel - pdf-313p - CSPAN-Video
  • 2021 - Lessons Learned: Eric Dinallo, Journal of Financial Crises - 6p

GOV (House) - The Causes and Effects of the AIG Bailout- AIG Bailout Oversight Hearing - [PDF-171p,  VIDEO-CSPAN]

(p46) - John Tierney (D-MA):  

  • Mr. Dinallo.... You noted in your written statement that AIG is a holding company and owns a variety of insurance and other businesses.
  • And Massachusetts’ insurance commission was quick to share with me the fact that the problems at AIG are really those that deal not with its insurance subsidiaries but with its operations and holding company, those in the Financial Products Division, securities lending division and that area there.
  • The State-regulated insurance subsidiaries remain solvent and able to that pay their claims, correct

Eric DINALLO. Yes, sir. 

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  • 2008 1006 - NAIC to GOV Letter - Praeger, Waxman, Davis - [link to NAIC Page - 4p]
    • (p1-2)The problems stem from the operations of AIG’s holding company, its financial products division, and its securities lending division, regulated at the Federal level by the Office of Thrift Supervision (OTS).>

2009 0305 - GOV (Senate) - American International Group: Examining What Went Wrong, Government Intervention, And Implications for Future Regulation - aka Government Intervention and Regulation of AIG - [PDF-72pCSPAN, - Video-Senate-Error

  • (p4-5) - Senator Shelby (R-AL):  AIG’s problems, however, were not isolated to its credit default swap business.
    • Significant losses in AIG’s State-regulated life insurance companies also contributed to the company’s collapse.
    • Because AIG was unable to cover its obligations to both its securities lending and derivatives operations, it ultimately had to seek Federal assistance.
  • (p9) - Dinallo:  I think that it is important to put some of these numbers in context, because I disagree with the concept that the securities lending program had much of anything to do with the problems at AIG. 
  • (p10) - Dinallo:  The securities lending business, . is ...not the purpose or the reason for the Federal bailout.
    •  If there had been no Financial Products division involvement, I don’t think there would have been any bailout of AIG’s operating companies, certainly not the securities lending business. 

2010 0701 - FCIC Hearing - 2008 Financial Crisis and Derivatives, Day 2, Regulators Panel - pdf-313p - CSPAN-Video

  • 37:00 / (p205/206) - Dinallo, Born (FCIC) -
    • COMMISSIONER BORN: Thank you. Mr. Dinallo, some people have suggested that the real problem at AIG related to its securities lending program, and that its exposure to AIG Financial Products through that company's credit default swap business was a mere secondary problem that it had.
      • Do you agree with that?
    • DINALLO: I don't--no, I don't believe that's true.
      • I mean, at least the calls that I received and the reason that we all ended up at the Fed and working at AIG throughout that week was the problems with the Financial Products Division, whose issues I think dwarfed the securities lending issues.
      • The securities lending issue was an issue, and it certainly exacerbated the situation.

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

  • Written Testimony - Dinallo - Superintendent of the New York State Insurance Department - 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.
  • 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 examinations.)
  • 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>

2021 - Lessons Learned: Eric Dinallo, Journal of Financial Crises - 6p

  • (p3) - In 2008, AIG’s securities lending operation lost billions of dollars when borrowers began to return securities and demand their cash collateral back.
    • AIG didn’t have that cash, because it was invested in mortgage-backed securities that were rapidly losing value.
  • Those securities lending losses, which were separate from the CDS losses at AIG FP, were part of the reason for the federal bailout.