Another day is dawning on Treasury Secretary Timothy Geithner´s baptism by fire and it will be an important one. Yesterday, investors and markets cheered when he unveiled details of his plan to clean toxic assets of banks´ balance sheets. Today, the House Financial Services Committee, with its bonus-hungry Democrats and its bloodthirsty Republicans, will interrogate Geithner, Federal Reserve Chairman Ben Bernanke and New York Fed President William Dudley on the orchestration of the AIG bailout. The hearing is just beginning, and Financial Services Committee Chairman Barney Frank, D-Mass., has announced what we all expected: That the questioning will be "open to other matters."
10:07am: Frank is saying "we need to give somebody...the power to do, when non-bank major financial institutions need to be put out of their misery, we need to give somebody the authority to do what the [Federal Deposit Insurance Corp.] can do to failed banks."
10:09am: Rep. Scott Garrett, R-N.J., opens by questioning "Mr. Geithner's leadership" and "the Fed's transparency." Look for a quick rebuttal from Frank, possibly via an interruption.
10:12am: Sticking to the letter of the hearing's topic, Garrett has demanded information on when the Treasury Department knew of the AIG bonuses and what it did to facilitate their distribution. No protestation from Frank.
10:14am: Rep Jeb Hensarling, R-Tx., is also sticking to the question of AIG bonuses. "We have see no convincing plan of sustainability, profitability and recoupment" for AIG's bailout. He's also saying Democrats could have stopped the bonus payouts while Republicans were not allowed to read all of the stimulus legislation. [insert more partisan accusations here]
10:16am: Rep. Paul Kanjorski, D-Pa., says he wants to examine "whether powers exist within the federal government to unwind AIG if necessary."
10:20am: Rep. Michael Castle, R-Del., wants to know what Geithner knew and when. "Could something have been done before we passed legislation that most likely nobody really wanted to vote for" to claw back the bonuses? Finally, we say at BankThink, an admission of legislators' remorse for the much-feared 90% bonus tax.
10:23am: Geithner's speaking now. "We did not have the authority to unwind AIG," he said. There was no choice but to bail out the company. There also was no choice but to pay the bonuses, according to written contracts.
10:28am: Frank interrupts Geithner's defence of the AIG bailout to yell at a protester with a sign.
10:29am: Geithner is calling for broader powers for a resolution authority and says the Treasury will suggest legislation on it. "The US government as conservator or receiver" would be able to renegotiate contracts at will as well as break up companies.
10:30am: Now it's Bernanke's turn. He's going to justify the Fed's assessment of AIG as a systemic threat.
10:34am: Bernanke is methodically describing the potential effects of AIG's failure on the various areas of the financial system and how the Fed's moves prevented the worst damage.
10:37am: Frank has yelled twice now at protesters waving signs in the hearing's audience. He says it's distracting. And indeed there is a pink sign floating behind Bernanke's head which reads "BAIL ME OUT."
10:40am: Benanke, too, says the best thing to do would have been to put AIG into conservatorship or receivership, but there wasn't appropriate authority. He's also calling for "consolidated supervision of all systemically important firms." So far no ground-breaking details, but a consistent message.
10:41am: Frank began his questioning but was reminded quickly that Dudley still had to give his opening statement. This seems like a hint for how the rest of the hearing will play out.
10:45am: Dudley is talking now about the "inherent conflicts" that would have arisen had the Fed or the Treasury "exerted ownership control" over AIG. Does he disagree with the idea that some federal agency needs resolution powers for non-bank financial institutions?
10:47am: All three witnesses have now mildly admitted that the outrage over the AIG bonuses makes sense, but none has acted repentant. They don't think they've mishandled the AIG bailout. Their testimony is full of calm rationalizations that, on one hand, seem hard to refute. But doesn't the past week's legislative violence deserve a stronger reaction?
10:53am: Frank is asking Dudley how wide the reforms on executive compensation should be. "I thought you were talking about more than just AIG."
Dudley says no.
Bernanke: "Compensation that links performance and reward appropriately and...does not incentivize excessive risk-taking" is better than the current system.
Frank: "That lessens the possiblity that people will get into trouble?"
Bernanke: "It's an important issue."
Looks like the Democrats are trying to get the egg-heads on their side before going any further on executive compensation reform. So far, it's working.
Frank: "That's one of the things we will be returning to." He's linking incentive structure to systemic risk.
10:59am: Rep. Spencer Bachus, R-Ala. is grilling Geithner over payments to AIG counterparties. "These were parties that took a risk and entered into agreements with AIG, were they not?"
"It was an agreement between two parties, and AIG was on the verge of defaulting." Why were the counterparties paid off in full?
He seems to be distinguishing between "foreign banks, Goldman Sachs" and the counterparties Geithner mentioned as examples: "municipalities, pension funds."
11:02am: Frank cuts Geithner off mid-sentence while he's trying to explain why he couldn't have forced the AIG counterparties to take a haircut.
11:03am: Kanjorski suggests that AIG bonus fury is born of average Americans' feelings of exclusion from inside knowledge of the bank rescue operations.
11:04am: "It is clear that we are going to need to ask for and we will ask for broader authority over financial institutions" but, he says in response to a warning from Kanjorski, the Treasury hasn't decided whether it will need more money from Congress.
Kanjorski: "There's not a lot of sympathy up here to provide additional funds." But he admits that he understands, personally, that they may be necessary.
11:06am: Geithner is laying out the steps the Treasury wants to take to increase "transparency and accountability" in the financial rescue efforts. He's reviewing his transparency plans, released several weeks ago. There's nothing new. It's as if the bonus legislation the House passed were par for the course.
11:08am: Garrett is going after Frank. Aggressively. He's asking Geithner whether Frank weighed in early on the bonus payments.
11:10am: Geithner: "We were spending every minute, every molecule of oxygen, trying to contain on this fire." He's insistant that much of the knowledge of AIG's misbehavior was "in the public domain" from the beginning. He's so adamant that Frank has to interrupt him so that Garrett can continue questioning him. So this is how he's playing it: defiant, strong, and unapologetic.
11:12am: Garrett has moved on to Bernanke, who says he didn't know about the bonus payments much earlier than Congress did. He's much calmer than Geithner was.
11:13am: Now Garrett is asking what the prospects are for unwinding AIG.
Bernanke: "We have a very substantial, detailed plan for unwinding the company."
11:14am: Rep. Maxine Waters, D-Calif., is asking whether Goldman Sachs might be one of the five asset managers chosen to run the public-private investment funds for securities. "Underneath all of this is a conversation about the linkages and the connections of the small group of Wall Street types that are making decisions."
"Goldman Sachs is where Mr. Paulson spent much of his career, right?" Waters is asking Geithner. "Your CEO is from Goldman Sachs too, right?"
Geithner: "My CEO?"
Waters: "Your chief of staff...that's all I want to know!"
Geithner: Yes, for a time.
Waters: "Was anybody from Goldman Sachs involved that weekend" when authorities decided to sell Bear Stearns? Geithner begins to answer, but she cuts him off. "Goldman Sachs was involved in some way."
Geithner: "There were a whole range of institutions that were involved--"
But now she's on to Lehman Brothers. Goldman there? "I am just asking the questions."
11:18am: "This small group of decisionmakers at the center of it is Goldman Sachs, and that's what's causing a lot of the distrust. People are thinking or believing that Goldman Sachs, because of the connections, has a lot to do with the decisions that are being made."
11:20am: Rep. Peter King, R-N.Y., wants Geithner to make sure "the rules won't be changed in the middle of the game" for private sector participants in the toxic asset funds. Geithner's answer should help build confidence in the plan.
Geithner dutifully responds that the Congress needs to work with the Treasury to restor confidence.
King gets the 'measured question of the day' award. He asks how the AIG bonus issue can be resolved "without going too far."
"It's a difficult balance," Geithner replies, adding that the government shouldn't be dictating detailed executive compensation limits to bankers.
11:23am: Geithner says his executive compensation proposal will come quickly, but refuses to give a date for its release.
11:24am: Rep. Carolyn Maloney, D-N.Y., asks for "copies of both the Lehman analysis and the AIG analysis" to be provided to Congress to learn more about the government's motivations for intervening.
11:28am: "We did not act to help foreign banks" by bailing out AIG, Geithner is saying. "If you look at what happened, you can see concrete evidence of exactly what would have happened in the event of the failure of AIG." He disagrees with claims that AIG didn't--and does not now--pose systemic risk.
11:30am: Rep. Michelle Bachmann, R-Minn. is suggesting that the Treasury's "extraordinary actions" to bail out AIG are unconstitutional.
Geithner vehemently disagrees. "In the law of the land, of course," he says in response to hear demands that he cite the authority granted to him by the Constitution.
11:33am: Now Bachmann is asking why Bernanke and the Fed won't provide a list of names of banks using the discount window. "Why would the American people be disadvantaged by knowing this information?" Bernanke says the names are witheld to prevent the banks using the discount window from being stigmatized.
11:36am: Rep. Nydia Velasquez, D-N.Y., has asked what restrictions were placed on AIG executive compensation, and Bernanke is explaining the difference between limiting traders' bonuses and those of the top management. Apparently it's more acceptable to limit the pay of top managers. This could be an important distinction as new executive compensation regulations are laid out.
11:38am: Bernanke is telling Velasqueze that the Fed's loans to AIG will be repaid "and perhaps with some profit."
11:41am: Rep. Lynn Jenkins, R-Kan., says her constituents have "bailout fatigue." She wants to know whether the US will get the money back that went to AIG's foreign counterparties.
In response, Bernanke points out that the issue of supporting American counterparties hadn't caused any problems in European countries where banks had to be bailed out.
11:44am: Rep. Melvin Watt, D-N.C., asks Geithner about the resolution authority he is proposing. "Basically the Secretary of the Treasury would be the de jure interim regulator" for systemic risk?
Geithner: "We can't put it all on the Fed."
Watt: But "Mr. Bernanke is not subject to the politics of the day." The resolution authority shouldn't be a political appointee. And we shouldn't let an interim authority slow down our process of permanent regulatory restructuring.
Geithner: "Our judgment is we want to use a mecahnism built on the current FDIC model" which requires a agreement by the president, the Treasury, and the Fed.
Bernanke: And systemic risk regulation could be separated from resolution authority.
11:48am: Castle is asking Geithner when he first knew about the bonuses.
Geithner: "I was briefed by my staff on March 10." But it would not have affected our choices at that time.
11:51am: Bernanke is detailing the duties a systemic risk regulator would have. He says that the oversight would include not just individual financial firms but a general attention to the structure of the system, including its compensation norms, trading practices and other phenomena.
11:53am: Rep. Gary Ackerman, D-N.Y., always good for a show, has opened his questioning with the declaration that "the real problem is greed."
"The problem is greed assisted by innovation...we have to exert a little bit of common sense into the process...gimmicks are not financial products."
Now he's asking Bernanke whether "we're going to stop pretending that [credit-default swaps] are insurance."
Bernanke: "Those who use CDS instruments" need appropriate hedging. There needs to be a central counterpart, too.
11:57am: Ackerman wants to "ground" all CDS "until we fix the mechanism."
11:58am: Rep. Edward Royce, R-Calif., is questioning the current management of AIG and the company's moves to win more insurance business by lowering prices.
12:04pm: Rep. Brad Sherman, D-Calif., is demanding a "chart for each recipient of Tarp money" detailing the bonus paid out to bankers at those institutions. "Are you going to give us the chart or are you going to hide the ball?"
Geithner: "I'm not going to hide the ball--"
--but Sherman has moved on to questions of whether bonuses paid to bankers already have violated existing executive compensation laws.
He's reading from transcripts in which Neel Kashkari, the undersecretary for financial stability at the Treasury, claims that multi-million dollar bonuses aren't inappropriate executive compensation.
Geithner: I take responsibility for those judgments.
12:10pm: Rep. Frank Lucas, R-Okla., is asking for an estimate from Geithner on how much money the government could make from its public-private partnership on toxic assets.
Geithner is assuring the committee that there's potential for the government to make money.
12:14pm: Another call for CDS regulation from Rep. Gregory Meeks, D-N.Y., to which Geithner responds that CDS trading needs to have better reporting requirements and to be moved to a central clearing platform.
Meeks is also asking whehter Geithner believes that executive compensation limits could drive finance jobs out of New York.
Geithner replies that New York needs "a better system" in general, including higher standards for protection against financial turmoil.
12:18pm: Rep. Ron Paul, R-Tx., is laying out the tenets of capitalism and claiming that too much regulation, along with too much reliance on capital allocations from the government, should share blame for the financial crisis.
12:23pm: Rep. Dennis Moore, D-Kan., asks for a number representing the total risks to taxpayers from the government's rescue efforts.
Moore wants to know whether Bernanke still thinks the bailout bill and the stimulus bill were the right moves. Bernanke says yes; Geithner concurs.
12:28pm: The committee members are sticking mostly to questions about AIG. The republicans have lost steam on their intitial moves to suggest that Geithner might still have to leave his post as Treasury secretary. Right now, Rep. Donald Manzullo, R-Ill., is picking up the pace a little by drilling Geithner on the losses taxpayers have suffered to their retirement plans. Is it fair for AIG policyholders to be kept whole while others saw their funds depleated?
Dudley steps in to defend that aspect of the AIG bailout.
12:31pm: Bernanke has called Manzullo's question "a poorly posed question." Meanwhile Frank has scolded Geithner for trying to talk over Manzullo. Overall, the witnesses' responses reveal unflappable confidence. They're pulling off this hearing with notable grace.
12:32pm: Rep. Michael Capuano, D-Mass., takes up where Manzullo left off, telling the witnesses that the AIG bailout could have been handled differently. Now he's on to the FDIC, which he claims is, by a roundabout way, "a taxpayer funded organization." He says the FDIC's guarantees of debt issued by the public-private investment funds in the toxic asset program adds to taxpayer risk.
"We're talking about $1 trillion of these toxic assets." But aren't there more than that?
Geithner: It's higher than a trillion, but not the $50 trillion estimate you just gave.
Capuano: The FDIC was there to protect me as a depositor. But they're being used to finance the purchase of toxic assets--how did that become the agency's role?
Now Capuano and Geithner are fighting over the definition of a collateralized debt obligation.
12:37pm: This post is getting long and cumbersome. Follow me BankThink to a fresh one, where a description of questions from Rep. Judy Biggert, R-Ill., will await.