“There were no discussions on AIG”

June 26, 2009

I’m sorry I missed this CNBC interview last week with Robert Wolf, chief of UBS Investment Bank in the U.S.  There’s a remarkably eye-opening sound bite.   (hat tip M. Mayer)

…there were no discussions on AIG during that three day period [the weekend Lehman failed].

Wait, really?  Does this mean the Fed had no idea AIG was about to collapse when it was working to resolve Lehman?  Two days later it threw $85 billion at them with completely insufficient security, a package that later expanded to $150 billion.

Clearly there needs to be some mechanism to receive the assets of failed systemically-important companies.  FDIC has its hands full with insured depository institutions.  It has no mandate, much less the capability to handle a behemoth like AIG.

But should we be giving more authority to the Fed to handle this?  There is a singular explanation for the financial bubble and ensuing collapse: leverage.  The Fed has ultimate control over leverage via the reserve requirements it is supposed to impose on banks.  Taken in by mathematicians whose models explained that leverage could be made riskless via complicated hedges, Greenspan/Bernanke/et al totally abdicated their responsibility to enforce sensible reserve requirements.

Yet Obama thinks they can handle a bigger book of business?


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untrue. there were plenty of discussions on aig. not as many as there were on lehman of course, but you have to triage at some point. also the impact of a potential aig failure was greatly magnified by lehman’s bankruptcy filing, since the real problem with an aig failure was the $300+ billion of reg capital relief that banks would have lost only 2 after lehman’s bankruptcy started a run on the major banks by investors. so saving lehman would have softened the blow of an aig failure.

saturday was almost all lehman discussions. sunday was split between aig, lehman, and merrill discussions. paulson/geithner mostly confined reps from different banks in different rooms, and then moved between them. that way bankers could answer questions about their balance sheets honestly. there’s no way wolf knew what went on in the other rooms. i know for a fact that the fed hired morgan stanley to advise them on aig on saturday night, and that geithner called around to all the major banks on sunday night and asked about their exposure to aig.

the fed isnt as stupid or unaware as the press thinks.

Posted by MarkJ | Report as abusive

Thanks MarkJ….good to know that Wolf is misinformed. Nevertheless, the Fed clearly can’t handle its existing mandate. Doesn’t makes sense to expand it. There’s got to be a better way.

What we really need is a Fed chair who’s willing to let deleveraging happen.

Posted by Rolfe Winkler | Report as abusive

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