Monday, March 2, 2009

Congress To Hold Hearing On Systemic Risk; Update On AIG, Citi

Congressman Paul Kanjorski (D-PA), Chairman of the Capital Markets, Insurance and Government Sponsored Enterprises Subcommittee (a subcommittee of the House Financial Services Committee chaired by Congressman Barney Frank (D-MA)) announced that his subcommittee will hold a series of hearings on systemic risk, with the first taking place this week.

The hearing, slated for Wed. March 5, will "examine how to improve the ability of the government to prevent private sector activities from putting at risk the stability of the U.S. economy [and] ...will assist the Financial Services Committee in crafting legislation to create a systemic risk regulator for the financial services industry."

In other news on the systemic risk front, the New York Times online is reporting AIG Reports $61.7 Billion Loss as U.S. Gives More Aid, with the additional government support coming to up to $30 billion. New initiatives were announced with respect to the government's role in assisting Citigroup as well, detailed below.

AIG Receives $30 Billion More Assistance From Treasury, Fed
According to a press release issued by the U.S. Treasury Department this morning: "The U.S. Treasury Department and the Federal Reserve Board today announced a restructuring of the government's assistance to AIG in order to stabilize this systemically important company in a manner that best protects the US taxpayer." To maintain stability of AIG while its global divestitures are in progress, the government has added a new equity capital facility which AIG can draw down up to $30 billion over time, in exchange for providing non-cumulative preferred stock to the U.S. Treasury.

"Given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high," notes Treasury's press release.

At the same time, the press release notes: "Treasury has stated that public ownership of financial institutions is not a policy goal and, to the extent public ownership is an outcome of Treasury actions, as it has been with AIG, it will work to replace government resources with those from the private sector to create a more focused, restructured and viable economic entity as rapidly as possible." See Treasury's press release for further details.

Treasury Could Hold 36% of Citi Under New Programs Announced
The U.S. Treasury Department issued a press release last week announcing that Treasury was willing to participate in a Citigroup program in which up to $25 billion of the preferred shares held by the U.S. Treasury would be converted to common stock.

As reported in the New York Times on Feb. 27: "After two multibillion-dollar lifelines failed to shore up Citigroup, the government will increase its stake to 36 percent, from 8 percent." However, the Treasury Department's press release notes "This transaction does not increase the amount of Treasury's investment in Citigroup," and the Washington Post noted that while "U.S. Plans Bigger Stake in Citigroup," that the "stock deal wouldn't require more money."

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