More on AIG Hearings

There are four witnesses. They didn't start speaking until 56 minutes into the hearing where they were given 5 minutes each for their statements.

Scott Polakoff, Acting Director Office of Thrift Supervision

AIG's problems came from the rapid decline in two areas, credit default swaps and business lending.
AIG stopped issuing CDS on mortgages in 2005, but had $50 billion of them on its books. They stopped them while the housing market was still good, but their model forecast problems. AIG's CDS were protecting on "the highest rated, super senior, AAA+ rated credit tranch of the collateralized debt obligations". As of Dec there have been no realized credit loses on these. The problems have come from the enormous sums of liquidity needed to meet collateral calls trigged by one these three events: rating agency downgrades of the company, of the underlying CDO or a reduction in the market value of the underlying CDO. AIG's security lending program began before 2000 lent securities from state insurance companies to 3rd parties who provided cash collateral. The cash was invested in residential mortgage backed securities which declined. When the trades expired, AIG has to pay the cash back to the 3rd parties. He also said some new regulations on these products is required.

So for the second part they bet on the mortgage market continuing to do well and lost and we have to foot the bill. I'm ok if that bill means we pay foreign banks or Goldman, if that's who lent the cash to AIG.

Joel Ario, Penn. Insurance Commissioner

I didn't get much out of this opening statement.

Orice Williams, GAO FInancial & Community Investment Director

The Fed's stated goal is to prevent systemic risk from ratings downgrades. The bailout has prevented further downgrades. AIG has had mixed success in restructuring plans, they've had problems selling some business units. This combined with the decline in their assets makes it harder for them to pay back the bailout money. GAO thinks (but has not concluded) that AIG prices on commercial property casualty insurance has been somewhat aggressive but is still reasonable. That is, the bailout money is not going to subsidize insurance rates at the detriment of AIG competitors.

Rodney Clark, Managing Director Standard & Poor's Financial Services Rating Group

For many years S&P had a AAA rating on AIG, this changed in 2004 and they've lowered it four times since then mostly on the CDS credit loses. The current rating is at A- but would be six notches below that (BB-) without bailout funds.