Q: Did Insurance Regulators tell AIG to Wind-Down their Securities Lending Business?

  • This regulator said it began discussions with the company about securities lending in 2006.
  • AIG told us it was unaware of the regulator's concerns.  (p15)

2011 09 - GAO - Review of Federal Reserve System Financial Assistance to American International Group, Inc -  152p

  • Eric Dinallo, Dixie Noonan, Richard Scott, Gtreenburg, Mark Hutchings, Martin Sullivan, GAO Report
  • (p60) - Response to Written Questions of the Senate Banking Committee from Eric Dinallo
  • (p65) - 1 According to an unofficial transcript, in my oral statement to the Committee on March 5, which I did not read, but presented from brief notes, I stated that we began working with the company to reduce the securities lending program ‘‘starting in the beginning of 2007.’’
    • Later in my testimony, I stated more precisely that ‘‘starting in 2007, we did begin to wind down’’ the program.
    • While we were working with AIG on issues related to the securities lending program in early 2007, in fact, as noted, we began working with the company specifically on reducing the size of the program towards the end of 2007. 

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

Securities Lending:

  • As of September 28, 2007, the on-loan balance totaled $91.6 billion, up from $72.5 billion as of August 31, 2006.
  • About $3.1 billion of balances represent trades with AIG companies, mostly with AIG-FP.  (p4)

2007 1023 - AIG Credit Risk Committee (CRC) - 6p

 3. Report of the October 2, 2007 CRC Portfolio Review of AIG Global Securities Lending - p4

  • 2008 1009 - WSJ - Further Loan To AIG Shows Fed Miscalculated Risks, By Liam Pleven, Carrick Mollenkamp and Craig Karmin - [link] - <WishList?>
    • AIG's securities-lender clients flooded the program for their collateral, creating a "mini-run" on the bank, says Doug Slape, chief financial analyst of the Texas Department of Insurance.
    • The company began drawing down on the Fed loan commitment to cover the collateral requests, it told Mr. Slape in recent conversations, he said.
    • By Oct. 3, Moody's Investors Service said AIG's default-insurance and securities-lending program had experienced "substantial losses and write-downs" due to mortgage securities.
    • The Texas regulator grew concerned about the exposure in 2007.
      • ⇒  At the time, AIG told Texas it recognized that it needed to retain more cash, Mr. Slape said.
  • 2009 0305 - GOV (House) - Perspectives on Systemic Risk - [PDF-254p
    • Terri Vaughan (NAIC CEO / IA): The New York Superintendent had been working to address the issue of securities lending in AIG, and the insurance company had reduced the amount, and was in the process of reducing it further, when it was overtaken by the problems with the credit default swap operation.

2010 0617 - FCIC - Transcript of Interview with Martin Sullivan_1.pdf (FCIC) - 139p

  • (p127-128) - SEEFER: Do you recall whether or not any of AIG's insurance regulators directed the company to reduce the balance of those portfolios? I should have--that portfolio?
  • MURPHY: The securities portfolio.
  • SEEFER: The securities lending portfolio.
  • SULLIVAN: I don't have a recollection of being instructed.
    • I have a vague recollection of one regulator raising questions, but not to the point where instructions were issued, as you articulated.
      • Again from the best of my memory.
  • SEEFER: Which insurance department was that?
  • SULLIVAN: Well, you're stretching back.
    • To the best of my knowledge, I think it was Texas. I think.
  • SEEFER: And understanding that you're not sure it was Texas, what were the concerns?
  • SULLIVAN: Unfortunately, that's one question too many. I simply can't recall.
  • SEEFER: I mean let me try. Do you recall if their concerns were just too high a level of exposure?
  • SULLIVAN: I simply can't recall.  

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

  • 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>
  • 2007 1205 - AIG - American International Group Investor Meeting - 518p
    • (p355)
      • Unidentified Audience Member - Hi. I just have a question on your portfolio -- overall portfolio.
        • Based on the current environment, where is it that you're buying more or increasing your relative bidding?
        • In terms of asset classes, where are you backing off?
        • And specifically on subprime RMBS, do you see an opportunity to increase the allocation to that asset class?
          • Or, are you trying to get rid of what you own?
      • Richard Scott - American International Group - SVP - Investments
        • One of the clear opportunities here is that if you believe, as we do, that the AAA sector of the RMBS market is money good and if you could truly buy those securities at significant discounts, there's a huge opportunity.
        • And there's a bit of resistance to catching the falling knife.
        • But on the other hand, we've got a long-term view.
        • And if we can buy that paper at meaningful discounts to par and have high confidence that we're going to get paid back over the next three or four years, we should be buying a lot of that.
        • But as I say, not very much of it is trading. So --. 
      • Win Neuger - American International Group - EVP, Chief Investment Officer
        • Yes. I think there's some short-term technicals to the market that would probably have me be a little cautious in the short run, including the fact that there's some seasonals to delinquency patterns that typically peak in the first quarter of the quarter of the year, which I think are going to lead to some more fun headlines before we get out of the woods.
        • So realistically from a tactical viewpoint, I'm probably in a neutral position right now.