Starr v United States - Document 428

  • (p36 / 89) - 7.5 AIG’s Securities Lending Operations Faced the Same “Run on the Bank” Pressures as Many Other Financial Firms.
    • (a) Bernanke: “Whenever there was doubt about a firm, as in a standard bank run, the investors, the lenders, and the counterparties would all pull back their money quickly for the
      same reason that depositors would pull their money out of a bank that was thought to be having trouble.” (PTX 708 at 79).
    • (b) Deloitte & Touche: “Because of the significant market turmoil caused by the Lehman bankruptcy filing, [AIG] experienced severe financial distress due to liquidity requirements at one of its subsidiaries and its inability to maintain its securities lending relationships.” (JX 387 at 2).
    • (c) Between September 15 and 22, AIG’s cumulative liquidity outflow from collateral postings, securities lending balance outflows, and downgrades totaled $25 billion. (Cragg: Trial Tr. 5033:23 – 5036:14; PTX 5341 (Cragg demonstrative)).
    • (d) On September 12, 2008, Mosser sent an e-mail to Geithner and others at FRBNY
      stating: “Markets are also punishing AIG.” “Some banks are already pulling away; some banks
      are even turning down AIG in the secured (repo) borrowing markets”. “AIG’s repo book is all
      investment grade, mostly structured mortgage products. . . . Things that have, in the past, been used as repo collateral. . . . but the combination of being perceived as a weak counterparty and risky, illiquid collateral is resulting in counterparties stepping away . . . . Securities lending (mostly out of the insurance companies) – about $69B in liabilities, and the holding company has only enough cash to fund ½ of that, if sec lending counterparties turn away from the AIG name.” (PTX 42 at 1-2 (ellipses in original)).
  • (p37 / 90) - 7.6 The Freezing of Commercial Paper Markets Meant That AIG Was Not Able to Roll Over Its Commercial Paper as It Became Due.
    • (a) “On September 12, 2008, two of AIG’s non-insurance subsidiaries, International Lease Finance Corporation (‘ILFC’) and American General Finance (‘AGF’) were unable to roll over their commercial paper.
      • As a result, AIG advanced loans to these subsidiaries to meet their commercial paper obligations.” (Agreed to Stipulations ¶ 74).
    • (b) On September 12, AIG “had difficulty rolling its commercial paper programs” and believed it would “face pressure to roll its commercial paper facilities on Monday, September 15th”. (DX 296 at -683 to -684; see also DX 1503 at -917 (“since mid September there has been no capacity to issue commercial paper”)).
    • (c) Herzog: “if we weren’t able to roll the commercial paper, we . . . had to basically refund the cash”. (Herzog: Trial Tr. 7031:23 – 7032:8).
  • (p39 / 92) - 9.1 “The Failure of AIG Would Have Been Catastrophic for a Financial System Already in Free Fall.” (PTX 563 at 15; Geithner: Trial Tr. 1421:16-23).
    • Bernanke, Geithner, Baxter, Paulson, Alvarez
    • (e) Geithner: “In late 2008, AIG faced the prospect of default and bankruptcy, which would have had catastrophic consequences for the economy.
      • AIG was the largest provider of conventional insurance in the world, with approximately 75 million individual and corporate customers in over 130 countries.
      • If AIG had failed, the crisis would have almost certainly spread to the entire insurance industry.
      • The government took action to prevent AIG’s failure and to protect the financial system.
      • This included helping restructure the credit default swap contracts that AIG had entered into with various counterparties.” (PTX 563 at 3; see also Geithner: Trial Tr. 1425:14 – 1426:7).
    • (g) Bernanke: “AIG’s demise would be a catastrophe”. (PTX 599 at 77; see also Bernanke: Trial Tr. 1958:16-20).
  • (p66 / 119) - (c) “At 11:30 am on September 15, 2008, Mr. Willumstad, New York State Insurance Department Superintendent Eric Dinallo, FRBNY President Geithner, Treasury contractor Dan Jester, and certain Government officials, as well as representatives of Morgan Stanley, JPMorgan, and Goldman Sachs attended a meeting at FRBNY.” (Agreed to Stipulations ¶ 95)