In the eight months before AIG received a taxpayer bailout that now stands at $180 billion, top officials at the firm’s main federal regulator paid scant attention to the troubled insurer.
Then Office of Thrift Supervision (OTS) Director John Reich and then Deputy Director Scott Polakoff held no meetings dedicated to AIG until a 45-minute conference call on Sept. 15, according to a review of 2008 calendars.
The next day, AIG got $85 billion as part of a bailout that has since more than doubled.
Overall, a review of calendars for six key agency officials that The Hill obtained under the Freedom of Information Act indicates that AIG garnered little attention from high-ranking OTS officials in Washington, particularly when compared with other firms under their jurisdiction, which were the subjects of many specific meetings.
Five officials, including Polakoff and Reich, had at least 37 calls or meetings regarding Washington Mutual before the bank was taken into government receivership on Sept. 25, 2008. Four agency officials had a total of at least eight meetings about IndyMac before it failed on July 11, 2008.
OTS, which is housed in the Treasury Department, contends that top officials did discuss AIG before the September 2008 conference call.
“To suggest that calendar entries could begin to reflect the scope of OTS supervision of the institutions the agency regulates is nonsense,” OTS said in a statement responding to a set of detailed questions from The Hill. “Attempting to draw conclusions or infer insights from calendar entries is an exercise supported by scant facts and heavy doses of guesswork, supposition and lack of knowledge of the supervisory process.”
Before this spring, when million-dollar bonuses became synonymous with AIG, the firm was known primarily as one of the world’s largest insurers. At the federal level, it fell under the OTS’s principal oversight on financial issues, and almost six months to the day before that conference call, officials lower down at the agency had spotted troubling signs at AIG.
In testimony to Congress on Wednesday, AIG Chief Executive Edward Liddy, who came to the company after the bailout began, said OTS “simply lacked the capacity and the ability to adequately supervise” AIG’s investments in the complicated financial instruments at the heart of the crisis. AIG did not respond to questions from The Hill about how often the firm met or talked with OTS.
OTS spokesman William Ruberry said senior agency officials discussed AIG during internal calls and at a series of monthly “regional managers group” meetings and quarterly “high risk” meetings that appear on the calendars.
The agency would not provide minutes or notes to those meetings, however, because they contain “confidential supervisory information,” Ruberry said.
OTS did not respond to questions about why agency officials had meetings dedicated solely to Washington Mutual, IndyMac and other firms.
Top officials also spent time having lunch with and traveling to talk with heads of other companies, including some not even under the agency’s direct responsibility.
On March 7, 2008, Polakoff and John Bowman, now the acting OTS director, went to Charlotte, N.C., where Bank of America is headquartered, for a meeting about the bank. Reich would also call Ken Lewis, the firm’s embattled CEO, throughout 2008.
The agency has come under a flurry of criticism for lax oversight and for bending to the will of firms seeking deregulation of the financial industry. Many are now in the wreckage strewn by the financial crisis: Countrywide, IndyMac, Washington Mutual and AIG.
“AIG was pretty much allowed to do whatever they want,” said Rep. Elijah Cummings (D-Md.), who has aggressively investigated the insurance firm. “With this failure to properly supervise, it probably made the problems at AIG worse.”
Henry Paulson, President Bush’s Treasury secretary during the period covered by The Hill’s review, recommended scrapping the OTS more than a year ago, before the worst of the crisis hit.
Only one of the six key OTS officials and his staff appeared to have had more frequent discussions regarding AIG in the months before the September 2008 bailout.
Timothy Ward, OTS deputy director over examinations, supervision and consumer protection, had several meetings regarding AIG in the months leading up to mid-September. In the second week in May 2008, for example, Ward traveled to Bangkok, Thailand, where his calendar indicates he discussed AIG.
According to Ward’s calendar, staff associated with his division also had meetings regarding AIG in Amsterdam, Netherlands; Basel, Switzerland; Bermuda; London and New York.
Polakoff has acknowledged OTS could have done more to oversee AIG. In written testimony before the Senate Banking Committee this March, Polakoff said that the regulator “fell short” in its oversight of the risky credit default swaps that contributed to the firm’s downfall. (Polakoff is currently on suspension while officials investigate the agency’s oversight on a separate matter.)
OTS set up the Complex and International Organizations (CIO) division in 2004 to oversee large firms such as AIG. But by 2007, government watchdog agencies were concerned the division lacked the necessary resources and specialized skills to carry out its job. The Government Accountability Office issued a report in March 2007 that found CIO officials were just beginning to draw up a “formal supervisory plan” and were “looking to develop more systematic risk analyses.”
March of the following year was a critical time for OTS oversight of AIG. Polakoff said in testimony that OTS on March 3, 2008 communicated “significant supervisory problems” about the firm. A week later, C.K. Lee, CIO’s managing director, sent a letter to AIG lawyers that downgraded the firm’s examination rating. Polakoff testified that OTS had a “progressive level of severity in our supervisory criticism,” regarding AIG’s “risk management, corporate oversight, and financial reporting.”
The letter cited a “material weakness” in AIG’s oversight of the firm’s financial products division — the group that expanded deep into the world of credit default swaps. Liddy has said that division functioned as an “internal hedge fund.” AIG is in the process of closing it down.
The March 10 letter requested that AIG submit a “corrective action plan” a month later. That response itself came more than a month late. In May, AIG raised roughly $20 billion, Polakoff said in testimony.
And on Aug. 28, OTS reviewed the response and “ultimately accepted” the plan.
The AIG bailout began 19 days later. On Sept. 16, 2008, federal regulators committed $85 billion to AIG in the first of four bailouts.
Lee was also in transition, becoming OTS Western region director in July. At the same time, the agency shifted responsibility for daily interactions with AIG from CIO to the New York regional office, Ruberry said.
After the bailout began, top OTS officials spent more time talking and meeting specifically about AIG.
They had more than 25 calls or meetings about AIG after government money started flowing.
One of the first of those meetings occurred 15 days after the insurance giant’s initial bailout. On Wednesday, Oct. 1, 2008, the “regional managers group” meeting scheduled at 8:30 a.m. had a specific title: “AIG Discussion.”
