AIG - Perceived As Solvent

  • Scott ALVAREZ, FRB - General Counsel, Federal Reserve Board
  • Secretary Tim Geithner
  • Secretary Hank Paulson
  • Secretary Hank Paulson
    • 2010 - Book - On the Brink: Inside the Race to Stop the Collapse of the Global Financial System, by Henry M. Paulson
      • AIG's case the problem wasn't capital—at least we didn't think so at the time.
    • 2018 - CNBC - Former Treasury Sec. Paulson On The 2008 Crisis, Moderator: Andrew Ross Sorkin - [VIDEO-YouTube]
      • 10:48- 11:40 - Hank Paulson:
        • AIG was a dramatically different situation than Lehman Brothers. 
        • We had a situation with AIG where the market perception was that there was this liquidity problem... a serious one at the Holding Company, but that the insurance companies were well capitalized. 
          • They had independent ratings. And that they were solid.
          • And the Fed was able to make a loan looking at them as collateral. 
        • And so, the Fed made this judgement. I'm not saying that it was an easy judgement for them, but they made the judgement where the collateral was good. 
        • ⇒  And what was more important, in my judgement, is that the market accepted it.  
  • Secretary Tim GEITHNER: AIG -- inconceivable to me, going into the weekend, that we should or could do anything about AIG. I was completely against it. I thought it would be a mistake, not necessary. But I thought about it a lot.
    • I spent a lot of time over that weekend when we were doing this, looking at the way the insolvency regime would work for a global insurance company, and looking very, very carefully at the alternatives and what their basic balance sheet looks like. And I think there were three things that were sort of clear in the end.
      • One was that it would be a terrible mess, much worse than Lehman. Because they had Lehman-type risks for the entire system, but they also were an insurance company. They had written a huge amount of contracts. They would have the classic retail insurance panic that would have, in our judgment, made it much worse.
      • So it was -- I learned something about it over the weekend. Interesting. The insolvency regime had no capacity of managing.  --   It would have been just a terrible nightmare. Remember, it’s 80 countries, 50 states. Not designed for this.
        • ⇒ We spent a bunch of time with the insurance people, the experts on how this thing would work, it was a terrible, terrible mess.
        • I can’t be sure, but that was our basic deduction.
    • The other thing was, in the eyes of many people, their underlying insurance companies, which are generating a lot of earnings over time, made the whole company basically probably conditionally solvent if they could be funded.
      • So we could make the argument, legal argument, that we had the ability as the central bank because we were lending against collateral.
        • Congress had authorized that in 1930, or nineteen-whenever, when they did that.
      • And as long as there was enough collateral to lend against, we had real companies operating businesses that were generating a huge amount of earnings over time, huge market share.

2009 1117 - FCIC - Hearing - Financial Crisis Inquiry Commission - Timothy Geithner, Secretary of the Treasury - Closed Session  ---  [BonkNote]

  • Mark MCWATTERS, COP Member - Okay. Mr. Alvarez, Mr. Baxter, in the view of the Federal Reserve Bank, in the view of the Federal Reserve Bank of New York, is AIG today a solvent entity?
  • Scott ALVAREZ, FRB - General Counsel, Federal Reserve Board.  - So AIG does not have negative net worth. It has a positive cash capital. It is meeting the demand for loans as they come due.
  • Mark MCWATTERS, COP Member - Okay.
  • Scott ALVAREZ, FRB. So it does meet the traditional definition of solvency. It is repaying the Federal Reserve from the liquidation of assets in the Maiden Lane II and III facilities and also from the sale of its companies to repay the revolving line of credit. (p90)

2010 0526 - COP - Hearing - TARP and Other Government Assistance for AIG, Congressional Oversight Panel  ---  [BonkNote]

  • update: brief conversation with Jacob.
    • Told him we were "very reluctant" to open up another 13-3 facility for an entity not even an investment bank.
    • And that the market thought it was not only a liquidity problem but also a capital problem. He gave me the bridge to asset sales speech and then said he would get willumsted and call me back. I'm waiting.
  • [Bonk: Jacob =  Jacob Frenkel, AIG Vice Chairman]
  • [Bonk: willumsted = Bob Willumstad, AIG CEO]

2008 0913 - email - Donald Kohn (FRB-NY) to Scott Alvarez (FRB) - JX-046 - 1p

⇒ Case 1:11-cv-00779 - V2 - 2014 0930 - Trial Volume 2 - Alvarez - 231p