Elizabeth Warren on TARP Distribution
Friday, November 06, 2009SUSIE GHARIB: AIG posted today its second consecutive quarterly profit, but its shares tumbled almost 10 percent. The giant insurer warned that its businesses are still weak as sales and premiums continue to decline. Excluding charges, American International Group earned $2.85 a share in the third quarter. That compares to a stunning loss in the year ago period because of huge writedowns from credit default swaps. AIG also said today it plans to take a $5 billion charge in the fourth quarter as it spins off two smaller insurance units. The company is struggling to sell assets so it can repay more than $182 billion in government bailout loans. JEFF YASTINE: And speaking of bailouts, when Uncle Sam bailed out AIG and the big banks last year, it did so with direct cash injections and government guarantees. Those guarantees have allowed a handful of giant firms to save billions of dollars on their borrowing costs. Elizabeth Warren chairs the congressional oversight panel that's monitoring the bailouts. Stephanie Dhue spoke with her today about their program and its current risks and rewards.
ELIZABETH WARREN, CHAIR, CONGRESSIONAL OVERSIGHT PANEL FOR TARP: In terms of losing that money, the risk is substantially reduced. In fact, probably we never could have lost all of that money. A big part of it was guaranteeing money market funds. The real difference, however, is that while we still have some big guaranties outstanding -- Citibank being the biggest with $300 billion which is still a lot of money -- we really changed the market with those guarantees. And think for example, of money market funds. So up until a year ago, money market funds were uninsured and they paid about a point higher than passbook savings, which was insured. And when the money markets threatened to break the buck, a combination of Treasury and you know, the Fed and the FDIC came in and said we're going to guarantee those. They paid some fees. We ultimately as the taxpayers never had to pay off on those guarantees. And that guarantee expired September 18 -- no fanfare, no notes. Think about it. Is there now anyone left in America who doesn't believe that if money markets break the buck that the Federal government won't race right back in and guarantee them again?
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Your panel also found that a handful of giants, GE Capital, Goldman Sachs, reduced their borrowing cost to the tune of $25 billion. How does that make you feel about the program?
WARREN: So that again, is one of the consequences about what guarantees do. And they distort pricing. So that two financial institutions, otherwise similar in terms of their risk profile, one can borrow with a guaranty to back them up. They borrow much more cheaply and frankly suck capital away from the other financial institutions that don't have the guarantees, that aren't too big to fail and really begin to distort our marketplace.
DHUE: So with the regulatory reform making its way through Congress, will it address these moral hazards?
WARREN: Frankly, that's our only hope. If it doesn't address these moral hazards in an effective way, then we live in a new economic world and it's a world in which government guarantees, whether implicit or explicit, will drive powerful distortions in the market. So they really are right now in Congress deciding our future on that question.
DHUE: You're championing a consumer financial protection agency. But how will that one new agency be any better than a half dozen agencies that already have consumer protection authority?
WARREN: The problem we have right now is that Washington is structured not to do consumer protection. It's structured to take care of the banks. It's structured to take care of big monetary policy and let the consumer take the (INAUDIBLE). This is an agency that will be directly responsible to consumers, that will report to Congress and to the president of the United States to say, here's what we've done for the consumer credit market and here's where we failed. And you can hold us accountable.
DHUE: Now Congressman Barney Frank wants you to head that agency and your critics say you haven't had a -- any bank experience. What's your thought?
WARREN: I haven't proven my love for the banks. You know, my response
DHUE: You hate them.
WARREN: You know this really amazes me. I hate banks that cheat. I don't like practices like burying trips and tracks in 30 pages of fine print. I don't like practices that tell people this is what the mortgage looks like and it's only after they've signed that they find out what it really is. I actually want to see banks transparent, offer good products that are available to consumers. I want to see them innovate in ways that are helpful to consumers.
DHUE: Elizabeth Warren, thank you so much for joining us.
WARREN: Thank you.
