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Tuesday, January 26, 2010

NY Times: AIG Hearing Preview

by Calculated Risk on 1/26/2010 03:49:00 PM

From the NY Times Dealbook: A Preview of the House’s A.I.G. Hearing

DealBook has obtained the prepared testimony of three of the witnesses called by the House Oversight and Government Reform Committee: Thomas C. Baxter, general counsel of the Federal Reserve Bank of New York; Stephen Friedman, the former chairman of the New York Fed, and Elias Habayeb, the former chief financial officer of A.I.G.
Dealbook provides the statements of all three.
In his prepared remarks, Mr. Baxter defended the A.I.G. bailout, saying a bankruptcy by the insurer “would have had catastrophic consequences for our financial system and our economy.” He called the decision to rescue A.I.G. “a difficult one,” but one that the Fed’s policymakers felt compelled to make.

Mr. Baxter explained that the New York Fed felt compelled to pay out A.I.G.’s counterparties in full to unwind derivative contracts because “there was little time, and substantial execution risk and attendant harm of not getting the deal done by the deadline of Nov. 10,” when A.I.G. was scheduled to report its earning and could face downgrades from credit ratings agencies. That would have led to more collateral calls and even greater liquidity problems for A.I.G., Mr. Baxter said.

He added, “Even in a best-case scenario, we did not expect that the counterparties would offer anything more than a modest discount to par.” Under the circumstance, he said, “the Federal Reserve had little or no bargaining power.”
The TARP Inspector General Neil Barofsky will also testify although Dealbook doesn't provide his statement. Barofsky's comments on the AIG bailout, the benefits to counterparties, and his investigations into possible misconduct will be closely scrutinized.