inside the meltdown

They Couldn't Let AIG Fail

Sheila Bair Chair, Federal Deposit Insurance Corporation

... The political repercussions of the AIG situation, I think, would argue for greater public articulation of the reasons for the government support and why it's necessary; ... also a public articulation of what the true taxpayer exposure is there. ... We're in extraordinary times, unprecedented times, really. You have to go a long time back before you would find an economically stressed situation on a parallel for what we're dealing with now.

So it's unavoidable; there are going to be losses. I think the public can understand that. But I think we need to articulate why it was necessary for the government to come in, why this stabilized more broadly the financial sector. I've talked to my fellow regulators about this, and I think everybody agrees. We've had to react to the moment, and I support all the measures that have been taken. But if we can come up with more generic, transparent approaches ... and say, "OK, if a bank or if a large financial institution gets into trouble, this is what's going to happen; this is the process we're going to follow," I think it would get away from this sense that it's inconsistent, it's ad hoc, somebody's getting a better deal than somebody else. That troubles me. ...

Barney Frank Chair, House Financial Services Committee (D-Mass.)

… How did you feel when you heard that AIG was in trouble and needed government help?

We didn't hear that they were in trouble and needed government help. We heard they were getting government help. That is, we were told. Paulson and Bernanke asked us to meet with them and said, "We are giving them $85 billion."

I said to Bernanke, "Do you have $85 billion?" And he said, "I've got $800 billion." That's when I realized the depth of his capacity under this Depression statute. ...

Under the law that was passed in the '30s, the Fed has the ability to lend anything it wants to any entity in America, as long as it is adequately collateralized. The Fed has a lot of money. And what he said was: "I have $800 billion. I can lend anybody anything I want to as long as I think I'm getting adequate collateral." I was not fully familiar with that statute, and a lot of other people weren't either.

But I thought at that point it was an unfortunate necessity to keep AIG from defaulting. I also felt at the time -- and I still do -- that we are probably protecting, in that AIG is a good example of the importance of regulation and the dangers of its absence. AIG is a collection of well-regulated insurance companies that are still making money today, and the holding company at the top that took the profits generated by the insurance company and speculated in the most irresponsible, unregulated way.

So I do think over time we will get our money back from AIG, because those insurance companies are continuing to throw up profits.

Mark Gertler Economist, New York University

But then came AIG. And to me, AIG was the low point of this crisis, and the reason is that this was a huge insurance company that had a very good credit rating that was outside the Fed's regulatory framework. The Fed doesn't regulate insurance companies. But lo and behold, it had been using its good credit rating to acquire these mortgage-backed securities.

That, to me, was the most demoralizing moment of this crisis. To me, this signaled everything that this crisis was about: You have a regulatory framework that's just out of whack with the financial system. You have financial institutions that are gaming the system. AIG is a big entity. This causes chaos in the market. And personally, people say, "Oh, you should have seen the crisis." I don't see how anybody could have seen this, certainly, anybody policy-making. The Fed has regulatory responsibilities, but AIG was not within the Fed's regulatory net. ...

Alan "Ace" Greenberg Former CEO, Bear Stearns

I talked to a fellow from AIG yesterday who said AIG would not have got into the trouble it got into if Lehman would have been kept alive.

AIG was in trouble months before Lehman got in trouble. AIG was one of the biggest writers of credit default swaps. The person writing them didn't know what he was doing. He wasn't charging enough money. He was just writing them, getting a commission on what he was doing. That was in the paper also. I didn't look at AIG's books, but they had somebody in London who was just writing these things like crazy, and there was nobody watching what he was doing. All of a sudden AIG woke up and saw they had insurance liabilities that they had no idea they had. And all of a sudden the people said: "OK, I bought a credit default swap. The thing went bust, and pay me." That's what their problem was. It had nothing to do with Lehman. Nothing. AIG was in trouble months before Lehman went under.

How does a company like AIG get in that kind of trouble?

I guess they didn't watch what was going on in England.

And one small thing like that can --

It wasn't small; it was huge. They're still paying these things off. ... It's OK to write insurance as long as the premium resembles the risk, right? That didn't. So when they said credit default swaps are awful, yeah, if you write dumb things, anything is awful.

The government throws in $85 billion to AIG that same week right after Lehman. Why?

According to the government, they think they're well protected. They think they'll end up making money off of that. They virtually own AIG now. They own 80 percent, I think, of the common stock. AIG insurance is still a very big name throughout the world. They're not a very big name in credit default swaps, but the rest of the insurance business seems to be OK. If they ever see an end to credit default swaps, they'll start making a lot of money. So to say the government has lost $140 billion on AIG is wrong. It's much too early to figure that out, much.

But they're in there. They're exposed anyway.

They're in there, and they have assets to cover it.

Paul Krugman The New York Times

What's interesting about AIG was that, in some ways, the AIG rescue was the opposite extreme. We went from government is going to get out of the business of bailouts with Lehman, and then three days later, we have effectively a full nationalization and the government taking an 80 percent ownership stake in AIG.

That's the sort of thing I suspect that the Fed is fine with, because people at the Fed know about the Swedish bank rescues of the early '90s. They know that this sort of thing is a temporary measure, is what you do in extreme circumstances. Must have been very, very strange for Treasury to find itself in that position.

posted february 17, 2009

inside the meltdown home page · watch online · dvd/transcript · credits · site map
FRONTLINE series home · privacy policy · journalistic guidelines

FRONTLINE is a registered trademark of WGBH Educational Foundation.
Web Site Copyright ©1995-2014 WGBH Educational Foundation
Main photograph © WGBH Educational Foundation / All rights reserved