In A.I.G. Bailout, Amnesty for Big Banks - DealBook Blog - NYTimes.com

In A.I.G. Bailout, Amnesty for Big Banks
June 30, 2010, 7:00 am


When the U.S. government began rescuing American International Group from collapse in the fall of 2008 with what has become a $182 billion lifeline, A.I.G. was required to forfeit its right to sue several banks — including Goldman Sachs, Société Générale, Deutsche Bank and Merrill Lynch — over any irregularities with most of the mortgage securities it insured in the precrisis years, The New York Times’s Louise Story and Gretchen Morgenson write.

But after the Securities and Exchange Commission’s civil fraud suit filed in April against Goldman for possibly misrepresenting a mortgage deal to investors, A.I.G. executives and shareholders are asking whether A.I.G. may have been misled by Goldman into insuring mortgage deals that the bank and others may have known were flawed.

Unknown outside of a few Wall Street legal departments, the A.I.G. waiver was released last month by the House Committee on Oversight and Government Reform amid 250,000 pages of largely undisclosed documents. The documents, reviewed by The New York Times, provide the most comprehensive public record of how the Federal Reserve Bank of New York and the Treasury Department orchestrated one of the biggest corporate bailouts in history.

The documents also indicate that regulators ignored recommendations from their own advisers to force the banks to accept losses on their A.I.G. deals and instead paid the banks in full for the contracts. That decision, say critics of the A.I.G. bailout, has cost taxpayers billions of extra dollars in payments to the banks. It also contrasts with the hard line the White House took in 2009 when it forced Chrysler’s lenders to take losses when the government bailed out the auto giant.

This month, the Congressional Oversight Panel, a body charged with reviewing the state of financial markets and the regulators that monitor them, published a 337-page report on the A.I.G. bailout. It concluded that the Federal Reserve Bank of New York did not give enough consideration to alternatives before sinking more and more taxpayer money into A.I.G. “It is hard to escape the conclusion that F.R.B.N.Y. was just ‘going through the motions,’ ” the report said.

Even with the financial reform legislation that Congress introduced last week, David A. Moss, a Harvard Business School professor, said he was concerned that the government had not developed a blueprint for stabilizing markets when huge companies like A.I.G. run aground and, for that reason, regulators’ actions during the financial crisis need continued scrutiny. “We have to vet these things now because otherwise, if we face a similar crisis again, federal officials are likely to follow precedents set this time around,” he said.

Analysts also say that real financial reform should require regulators to demonstrate much more independence from the firms they monitor.

In that regard, the newly released Congressional documents show New York Fed officials deferring to bank executives at a time when the government was pumping hundreds of billions of taxpayer dollars into the financial system to rescue bankers from their own mistakes. While Wall Street deal-making is famously hard-nosed with participants fighting for every penny, during the A.I.G. bailout regulators negotiated with the banks in an almost conciliatory fashion.

On Nov. 6, 2008, for instance, after a New York Fed official spoke with Lloyd C. Blankfein, Goldman’s chief executive, about the Fed’s A.I.G. plans, the official noted in an e-mail message to Mr. Blankfein that he appreciated the Wall Street titan’s patience. “Thanks for understanding,” the regulator said.

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House Gives Final Approval to Financial Overhaul - DealBook Blog - NYTimes.com

House Gives Final Approval to Financial Overhaul

June 30, 2010, 7:25 pm

The House on Wednesday adopted legislation to revamp the nation’s financial regulatory system, in a party-line vote that illustrated how the partisan bitterness in Congress prevented cooperation even on the shared goal of averting future economic crises and government bailouts of big banks, The New York Times’s David M. Herszenhorn reports from Washington.

The vote in the House was 237 to 192, with all but three Republicans standing in opposition to a measure that President Obama in his State of the Union speech said embodied one of the highest priorities of his administration: “serious financial reform.”

“If this bill were to fail,” the House speaker, Nancy Pelosi, said “we would be preserving a status quo that has left our economy in a wretched state.” Ms. Pelosi personally gaveled the vote to a close, with 234 Democrats joined by three Republicans in favor; and 173 Republicans and 19 Democrats opposed.

The Senate is also expected to approve the measure, but the majority leader, Harry Reid of Nevada, said that he would not be able to schedule a vote until after Congress returns from a weeklong recess for the Fourth of July.

Democrats in the Senate need the support of a few Republicans to complete the financial regulatory overhaul and one of those who supported the Senate version of the bill, Scott Brown of Massachusetts, said he wanted to spend the recess reviewing the final language.

The bill gives government regulators the authority to liquidate failing financial companies, by breaking them apart, selling off assets and forcing creditors and shareholders to take losses so that taxpayers do not foot the bill.

The legislation also vastly expands the regulatory powers of the Federal Reserve and establishes a systemic risk council of high-ranking officials, led by the Treasury secretary, to detect potential threats to the overall financial system. It creates a powerful new consumer financial protection bureau, widens the purview of the Securities and Exchange Commission to broaden regulation of hedge funds and credit rating agencies.

The measure restricts the ability of banks to invest and trade for their own accounts — a provision known as the Volcker Rule, for its proponent, Paul Volcker, the former Fed chairman — and creates a new regulatory framework for derivatives, the complex financial instruments that were at the heart of the 2008 crisis.

The bill was shepherded through the House by Representative Barney Frank, Democrat of Massachusetts and chairman of the Financial Services Committee, who spent more than a year drafting it even as Congress was mostly focused on health care.

The mostly party-line House vote stood in contrast to the bipartisan approval of the $700 billion financial system rescue in October 2008, when 172 Democrats and 91 Republicans joined in support of the bill requested by President George W. Bush.

Ms. Pelosi recalled that effort on Tuesday in her speech urging passage of the regulatory overhaul.

House Republicans complained that the Democrats’ legislation would extend the reach of government regulators too far, that it would encourage rather than prevent future bailouts, and that it would not address the causes of the financial crisis because it does not deal with the government-controlled mortgage giants, Fannie Mae and Freddie Mac.

Democrats said that Republicans had tried — and failed — to prevent the government from responding to the worst financial downturn since the Great Depression and had put their desire to obstruct Mr. Obama’s agenda ahead of the nation’s best interests.

“When you look at this legislation it is proof positive again that this majority just doesn’t get it,” said Representative Mike Pence of Indiana, the No. 3 House Republican. “Under the guise of financial reform, Democrats today are pushing another bill that will kill jobs, raise taxes and make bailouts permanent.”

Representative Chris Van Hollen of Maryland, a member of the Democratic leadership, said the bill would establish safeguards against future crises. “Never again will we allow the American economy to be held hostage to bad decisions made by wall street and the financial sector,” Mr. Van Hollen said. “Unfortunately our colleagues on the other side of the aisle haven’t gotten this message.”

Representative Paul E. Kanjorksi, Democrat of Pennsylvania, expressed disbelief at the Republican opposition. “To now make the argument that we need do nothing,” he said, “is pure ludicrousness.”

In speech after speech, Republicans relentlessly attacked the legislation as a threat to free markets, and to economic recovery and job creation.

“This legislation is a clear attack on capital formation in America,” said Representative Eric Cantor of Virginia, the Republican whip. “It purports to prevent the next financial crisis, but it does so by vastly expanding the power of the same regulators who failed to prevent the last one.”

Mr. Cantor added, “It’s the notion that you can solve a problem by reflexively piling vast new layers of new bureaucracy and regulatory costs and taxes on it.”

Mr. Obama had wanted the bill completed and on his desk by Independence Day and the delayed vote in the Senate represented a small victory for Senate Republicans who are working hard to run down the clock and deny Democrats a chance to notch legislative accomplishments between now and the mid-term elections in November.

But the Democrats also see political advantage in the Republican opposition, and Mr. Obama, at a town hall meeting in Wisconsin on Wednesday, seized on comments by the House Republican leader, Representative John A. Boehner of Ohio, in which he said of the financial regulation bill, “This is killing an ant with a nuclear weapon.”

“You would think this would be a bipartisan issue,” Mr. Obama said, adding, “He compared the financial crisis to an ant. This is the same financial crisis that led to the loss of nearly eight million jobs, the same crisis that cost people their homes, their life savings.”

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