Fed Shoulders AIG Loan Losses of $450Million to Ease Sale to MetLife

By Hugh Son

March 11 (Bloomberg) — The Federal Reserve Bank of New York and American International Group Inc. agreed to shoulder as much as $450 million in losses tied to the insurer’s Japan real estate bets as part of the sale of a division to MetLife Inc.

MetLife won an accord to split most declines on $1 billion in commercial mortgages included in the $15.5 billion purchase of the AIG unit, according to a MetLife regulatory filing and the company’s chief financial officer. A corporate vehicle owned by the Fed and New York-based AIG will use MetLife stock gained in the sale to pay for future real estate losses, reducing the assets left to repay taxpayers, said two people with knowledge of the arrangement.

AIG’s Japan mortgage holdings were deemed a “more troubled asset” by MetLife, which is also indemnified from losses on one of the U.K. businesses it will acquire in the purchase of American Life Insurance Co. AIG said March 8 it is divesting Alico, which operates in more than 50 countries including Japan, to pay down bailout debts on a $60 billion Fed credit line.

“You have to ask yourself, ‘does the American taxpayer have any hope of getting their money back any other way besides selling this business?’” said William Cohan, a former JPMorgan Chase & Co. banker and author of “House of Cards,” about the financial crisis. An agreement for one side to retain some risk is typical in deals “when the buyer and seller have a difference of opinion about an asset,” he said.

Read more here:  http://www.businessweek.com/news/2010-03-11/fed-shoulders-aig-loan-losses-to-ease-sale-of-unit-to-metlife.html

Senate financial bill appears likely to keep Fed as regulator of big banks

Brady Dennis, Washington Post

Key members of the Senate banking committee are coalescing around legislation that would strip the Federal Reserve of much of its regulatory authority but would leave the central bank with oversight of the nation’s largest banks, according to aides familiar with the ongoing negotiations.

Under the plan, the Fed would continue to supervise only 23 bank-holding companies with assets exceeding $100 billion. Supervision of the nearly 5,000 banks below that threshold would fall largely to a proposed new regulator to be created by merging the Office of Thrift Supervision and the Office of the Comptroller of the Currency, aides said.

In addition, the Federal Deposit Insurance Corp. would take over regulation of more than 800 state-chartered banks that currently are part of the Federal Reserve System, according to the aides, who spoke on condition of anonymity because the talks are still ongoing and the provisions still could change.

Banking committee Chairman Sen. Christopher J. Dodd (D-Conn.) and freshman Republican Sen. Bob Corker (R-Tenn.) have been negotiating for weeks the particulars of a sweeping overhaul of the nation’s financial regulatory system and hope to have a draft within the next week.

Dodd’s initial draft of the bill last fall stripped the Fed entirely of its regulatory authority, leaving the central bank with the sole purpose of overseeing the nation’s monetary policy. The Fed’s prospects for retaining any oversight duties seemed uncertain at best, as committee members on both sides of the aisle heaped criticism on the agency for its failures in the lead-up to the financial crisis.

Read more here: http://www.washingtonpost.com/wp-dyn/content/article/2010/03/09/AR2010030903584.html

Way Too Big to Save

Simon Johnson, Huffington Post

Listening to US officials, talking to legal experts, and waiting for an intense Senate debate on financial reform to begin, you can easily form the impression that “too big to fail” adequately describes our most serious future systemic banking problems. It does not.

In September 2008, the large banks and quasi-banks at the heart of our financial system faced failure — and they were saved in the most immediate sense through actions taken by the Federal Reserve, but TARP (passed by Congress and run Treasury) also played a significant supporting role.

The Bush administration threw a small fiscal stimulus into the mix in early 2008, hoping to stave off recession; the Obama administration committed a much larger package at the start of 2009, aiming to prevent anything like a Second Great Depression. This fiscal policy response was in direct reaction to problems caused by the overextension and near failure of the financial system

Do not make the mistake — for example of Secretary Geithner, talking to the New Yorker — of thinking (or implying) that “saving the financial system” did not involve spending a lot of taxpayer money to support the real economy. Remember that if the economy crashes, asset prices fall, and banks’ problems become even more severe.

And try to avoid three further mistakes that are currently common.

Read more hear: http://www.huffingtonpost.com/simon-johnson/way-too-big-to-save_b_491325.html

Fed Audit Bitterly Opposed By Treasury

Sam Stein, Huffington Post

The Treasury Department is vigorously opposed to a House-passed measure that would open the Federal Reserve to an audit by the Government Accountability Office (GAO), a senior Treasury official said Monday. Instead, the official said, the Treasury prefers a substitute offered by Rep. Mel Watt (D-N.C.), and would like to see it enacted as part of the Senate bill.

The Watt measure, however, while claiming to increase transparency, actually puts new restrictions on the GAO’s ability to perform an audit.

Secretary Tim Geithner, Assistant Treasury Secretary Alan Krueger and Gene Sperling, a counselor to the secretary, held a briefing Monday with new media reporters and financial bloggers during which they discussed the Fed audit and other topics. Under the briefing’s ground rules, the officials could be paraphrased but not quoted, and the paraphrase could not be connected to a specific official.

HuffPost reporter Sam Stein lodged what he called a “formal complaint” against the ground rules. The complaint was noted and the briefing began.

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