Drama on the Hill

Today the House Subcommittee on Capital Markets conducted a hearing on “AIG’s impact on the global economy.” The hearing has been scheduled for a while, but the current furor over payment of bonuses by AIG made it the focus of much attention and even a protest by none other than Code Pink, looking for a way to stay relevant now that the Iraq War is more or less won:

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The man of the hour was Edward Liddy, Chairman and CEO of AIG. Liddy acquitted himself well; I’ll have more to say about his testimony later. But all of the witnesses were of interest, and the hearing was highly informative.

One of the most significant exchanges, in my view, was with Scott Polakoff, Acting Director of the Office of Thrift Supervision. Part of the mythology that the Democrats are trying to create out of the financial crisis is that it is due to a lack of regulation (or, better yet, “deregulation”). In fact, the industries involved are heavily regulated, and I’m not aware of any instances where a lack of regulation, as opposed to a failure of regulation, is to blame for a significant aspect of the crisis. In general, what happened was that regulators and businessmen made the same mistake: they failed to foresee the decline in real estate values and, perhaps more important, failed to understand fully the consequences that would flow from such a decline. That is the context in which Polakoff’s testimony was revealing:

HENSARLING: I believe I heard in an earlier answer to one of the questions, I believe I heard you say that OTS in 2004 should have stopped the book of business that I think you were alluding to to CDS and the AIG securities lending commitments. Did I understand you correctly?

POLAKOFF: Yes, sir.

HENSARLING: So if you said you should have stopped it in 2004, that implies you could have stopped it in 2004. Is that correct?

POLAKOFF: Yes, sir.

HENSARLING: So there were not limits on your power. Perhaps, there were limits on your knowledge or insight, but there was not limits on your power to stop what you cite, as I believe AIG’s liquidity — I’m reading from your testimony — was the result of AIG’s business lines. So you did have the power to stop those business lines. Is that correct?

POLAKOFF: Yes, sir. ***

HENSARLING: Again, it appears, if this is correct, it was not a lack of supervisory authority that caused you not to take action with respect to these two lines. Is that correct?

POLAKOFF: Yes, sir.

HENSARLING: And I think I also heard you say in your testimony that you did not have [in]sufficient manpower and expertise. Is that correct?

POLAKOFF: Yes, sir.

HENSARLING: So, again, in retrospect, it wasn’t the lack of authority. It wasn’t the lack of resources. It wasn’t the lack of expertise. You just flat made a mistake. Is that a correct assessment?

POLAKOFF: In 2004, we failed to assess how bad the mortgage economy, the real estate economy would become in 2008. Yes, sir.

It’s never been clear why liberals have so much faith that regulators are smarter or better able to foresee the future than businessmen.

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