Countering criticism of the Federal
Reserve’s $85 billion bailout of the American International Group
(AIG) in September 2008, US Treasury Secretary Timothy Geithner has
told the Congressional Oversight and Government Reform Committee of
inaction’s dire consequences.
In his preamble to the committee, Geithner
stressed: “We did not act because AIG asked for assistance. We did
not act to protect the financial interests of individual
institutions. We did not act to help foreign banks.
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“We acted because the consequences of AIG
failing at that time, in those circumstances, would have been
catastrophic for our economy and for American families and
businesses.”
Expanding on the background to the bailout,
Geithner said that on 12 September 2008, AIG officials informed the
Federal Reserve and the Treasury the company was facing potentially
fatal liquidity problems.
“That weekend, we brought together a team of
people from the Federal Reserve, the New York State Insurance
Department and other financial industry experts to consider how to
respond to AIG’s problems,” Geithner said.
Though no one on the team fully understood the
extent and causes of AIG’s problems, Geithner said it was clear the
company’s failure would directly threaten the savings of millions
of Americans. Geithner was at that stage president of the Federal
Reserve Bank of New York.
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By GlobalDataCrisis would have spread
“If AIG had failed, the crisis
almost certainly would have spread to the entire insurance
industry,” said Geithner.
“Life insurance posed a particular threat.
Many life insurance products are effectively a form of long-term
savings. In the wake of a failure of AIG, policy holders could have
sought to liquidate life insurance policies underwritten by
AIG.
“Doubts about the value of AIG life insurance
products could have generated doubts about similar products
provided by other life insurance companies, opening up an entirely
new channel of contagion.”
From an international perspective, Geithner
told the committee that the failure of a large, global,
highly-rated financial institution such as AIG, which had written
hundreds of billion dollars of insurance, would have “dramatically
amplified” the crisis.
“Investors would have completely lost
confidence in their ability to evaluate the financial sector and
distinguish between firms that were viable and those that were
not,” Geithner said.
Geithner added a major problem at the time was
that it was impossible to separate AIG’s stable underlying
insurance businesses from the complex and dangerous financial
activities carried out by the parent holding company.
The final straw came on 15 September 2008 when
ratings agencies Fitch Moody’s and Standard & Poor’s downgraded
AIG’s credit rating, triggering demands for the company to post $20
billion in additional collateral, something that was clearly
impossible.
The Federal Reserve had no alternative but to
intervene, stressed Geithner, and on the following day extended AIG
an $85 billion line of credit.
Simultaneously, US taxpayers became the owners
of a 79.9 percent share in what was then the world’s largest
insurance company.
In early October of 2008, the New York Federal
Reserve extended another $37.8 billion in credit to AIG.
