GAO-11-616 - Federal Crisis: Review of Federal Reserve System
Financial Assistance to American International Group, Inc. In
September 2008, the Board of Governors of the Federal Reserve
System (Federal Reserve Board) approved emergency lending to
American International Group, Inc. (AIG)--the first in a series of
actions that, together with the Department of the Treasury,
authorized $182.3 billion in federal aid to assist the company.
Federal Reserve System officials said that their goal was to avert
a disorderly failure of AIG, which they believed would have posed
systemic risk to the financial system. But these actions were
controversial, raising questions about government intervention in
the private marketplace. This report discusses (1) key decisions to
provide aid to AIG; (2) decisions involving the Maiden Lane III (ML
III) special purpose vehicle (SPV), which was a central part of
providing assistance to the company; (3) the extent to which
actions were consistent with relevant law or policy; and (4)
lessons learned from the AIG assistance. To address these issues,
GAO focused on the initial assistance to AIG and subsequent
creation of ML III. GAO examined a large volume of AIG-related
documents, primarily from the Federal Reserve System--the Federal
Reserve Board and the Federal Reserve Bank of New York (FRBNY)--and
conducted a wide range of interviews, including with Federal
Reserve System staff, FRBNY advisors, former and current AIG
executives, AIG business counterparties, credit rating agencies,
potential private financiers, academics, finance experts, state
insurance officials, and Securities and Exchange Commission (SEC)
officials. Although GAO makes no new recommendations in this
report, it reiterates previous recommendations aimed at improving
the Federal Reserve System's documentation standards and
conflict-of-interest policies. While warning signs of the company's
difficulties had begun to appear a year before the Federal Reserve
System provided assistance, Federal Reserve System officials said
they became acutely aware of AIG's deteriorating condition in
September 2008. The Federal Reserve System received information
through its financial markets monitoring and ultimately intervened
as the possibility of bankruptcy became imminent. Efforts by AIG
and the Federal Reserve System to secure private financing failed
after the extent of AIG's liquidity needs became clearer. Both the
Federal Reserve System and AIG considered bankruptcy issues,
although no bankruptcy filing was made. Due to AIG's deteriorating
condition in September 2008, the Federal Reserve System said it had
little opportunity to consider alternatives before its initial
assistance. As AIG's troubles persisted, the company and the
Federal Reserve System considered a range of options, including
guarantees, accelerated asset sales, and nationalization. According
to Federal Reserve System officials, AIG's credit ratings were a
critical consideration in the assistance, as downgrades would have
further strained AIG's liquidity position. After the initial
federal assistance, ML III became a key part of the Federal Reserve
System's continuing efforts to stabilize AIG. With ML III, FRBNY
loaned funds to an SPV established to buy collateralized debt
obligations (CDO) from AIG counterparties that had purchased credit
default swaps from AIG to protect the value of those assets. In
exchange, the counterparties agreed to terminate the credit default
swaps, which were a significant source of AIG's liquidity problems.
As the value of the CDO assets, or the condition of AIG itself,
declined, AIG was required to provide additional collateral to its
counterparties.
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