Sec. Geithner just stated in his testimony that on Friday, Sept. 12, 2008, they knew AIG was in trouble.
"On Friday, September 12, 2008, AIG officials informed the Federal Reserve and the Treasury that the company was facing potentially fatal liquidity problems. As we obtained more details about AIG’s financial condition, it became clear they had massive liquidity needs and faced huge losses. Moreover, neither AIG’s management nor any of AIG’s principal supervisors -- including the state insurance commissioners and the OTS -- understood the magnitude of risks AIG had taken or the threat that AIG posed to the entire financial system.
That weekend, we brought together a team of people from the Federal Reserve, the New York State Insurance Department, and other experts to consider how to respond to AIG’s problems. We addressed two basic questions: 1. How would the failure of AIG affect the financial system and the broader economy? 2. What were the options for containing the damage from an AIG failure?
By Sunday night, it became clear that we did not have a willing buyer for Lehman Brothers and that it would have to file for bankruptcy. At that moment, we knew the crisis was about to intensify and spread more broadly. We also knew AIG was highly vulnerable. Nonetheless, even with those new complications, it still seemed inconceivable that the Federal Reserve could or should play any role in preventing AIG’s collapse.
The pressures that had caused the failure of Lehman Brothers and had brought AIG to the edge of collapse were symptoms of a broader adjustment moving swiftly through the financial system. In mid-September 2008, virtually all financial institutions were aggressively shedding risk that had been acquired over the long run-up to the crisis. Confidence was fragile and financial firms were trying to shore up their balance sheets by selling risky assets, reducing exposure to other financial institutions, and hoarding cash.
The impending Lehman bankruptcy added to that destructive cycle. Starting Sunday night, we saw not just an escalating run on banks, but also a broad withdrawal of funds from money market funds. These funds, always thought of as one of the safest investments for Americans, had begun trading at a discount. The run on these funds, in turn, severely disrupted the commercial paper market, which was a vital source of funding for many brick and mortar businesses.
The panic spread. Major institutions such as Washington Mutual and Wachovia experienced debilitating deposit withdrawals, eventually collapsed, and were acquired by competitors. These pressures spilled over to virtually all credit markets. Markets for instruments backed by consumer loans, such as auto loans, credit card receivables, and home- equity lines of credit collapsed, and in response banks tightened standards and sharply curtailed the issuance of new loans."
Now we know what really happened that weekend. The feds knew AIG was going to need help...they patched up a deal with Merrill to B of A and left Lehman in the lurch.
The Examiner and A&M are going to have a field day with this...IMO.
Coach T
