Updated at 9:38 AM ET Congress passed the bailout – TARP or Troubled Asset Relief Program -- amid the October 2008 financial crisis with the support of then-Sen. Barack Obama and GOP presidential candidate Sen. John McCain.
TARP special inspector general, Christy Romero, an Obama appointee, said Wednesday in her quarterly report that taxpayers still own 61 percent of the common stock of TARP’s biggest investment, the insurance giant, American International Group, and that AIG still owes the Treasury $36 billion from the rescue.
NBC's Lisa Myers reports on a new book by Neil Barofsky, the watchdog who oversaw the controversial $700 billion bank bailout known as TARP. He claims TARP was much more about taking care of Wall Street, than helping Main Street.
AIG’s involvement in financial vehicles called credit default swaps (CDS) went spectacularly bad in 20008, and the firm was careening toward collapse but was saved by a $182 billion rescue engineered by the Federal Reserve and by Congress through TARP.
The company’s stock -- worth over $1,400 per share in 20007 -- plummeted to less than $9 per share in 2009. It is now worth about $30 per share.
Now four years after the bailout, “AIG continues to maintain a portfolio of CDS and continues to engage in securities lending, albeit much smaller than prior to TARP,” Romero said in her report.
In an interview, Romero explained that the focus of her concern is a subsidiary called AIG Financial Products Corporation (AIGFP). “The size of AIGFP’s trading book is greatly diminished, but it may come as a surprise to some that any of AIGFP still exists at all,” her report said.
Romero’s report Wednesday said, “There is currently no Federal banking regulator with responsibility for overseeing AIG’s noninsurance financial businesses.” Referring to AIGFP, she said, “The concern comes with lack of regulation of that entity. This was an entity whose risky actions nearly brought down AIG and because of the size and interconnectedness of AIG, regulators determined at the time that AIG was too big to fail.”
The 2010 Dodd-Frank law set up a process for the Financial Stability Oversight Council (FSOC), headed by Treasury Secretary Tim Geithner, to designate AIG and other non-bank financial firms to as “Systemically Important Financial Institutions” (SIFI) and thus to be regulated by the Federal Reserve, but that has yet to happen.
“It’s not even clear what the time frame for them to do that is; it’s not even clear whether they’re going to do that,” Romero said. “Right now, there’s been no signal from federal regulators that they are going to designate AIG as a SIFI under Dodd Frank.”
Until that happens, she said, “there’s a big unknown as to whether there’s going to be any kind of federal regulator with oversight over all of AIG’s financial business.”
Geithner will testify Wednesday before the House Financial Services Committee and Thursday before the Senate Banking Committee on FSOC’s work and other issues.
“Congress can certainly urge – and some members of Congress have urged – FSOC to move on these designations. Even if they don’t move on all designations, decide on AIG,” Romero said.
AIG has paid back most of the $182 billion, partly through asset sales.
The Treasury has gradually sold off some of its holdings in AIG stock. And FSOC said in its annual report last week that the Treasury’s stake in AIG and the Federal Reserve Bank of New York’s investment in AIG “are likely to produce an additional profit for the U.S. public.”
“AIG has taken significant action since the crisis -- working with Treasury and the Federal Reserve -- to restructure, reduce risk, and streamline its operations to focus on its core insurance business,” Treasury spokesperson Matt Anderson said Wednesday.
But Romero asked, “Where is the exit strategy for AIG to get out of TARP? I haven’t seen a clear exit strategy.”
She added, “The purpose of TARP is financial stability -- so whatever strategy Treasury comes up with in terms of exiting this investment in AIG has got to be done in a way that assures financial stability.”
With the trauma of 2008 having faded, it’s not clear whether voters still care about TARP -- or are even aware of its continued existence. But TARP did play a significant role in several 2010 races, helping defeat members who voted for it.
Texas Sen. Kay Bailey Hutchison, Utah Sen. Robert Bennett, and South Carolina Reps. Bob Inglis and Gresham Barrett lost 2010 GOP primary contests partly due to their votes for TARP.
And in Pennsylvania Democratic Senate candidate Joe Sestak – facing Republican Pat Toomey who ran anti-TARP ads -- felt compelled to run an ad telling voters it “made me sick” to vote for the bailout and comparing his vote to cleaning up his dog’s excrement. Sestak lost.
This year it may be a sleeper issue in at least one Senate contest.
Nevada Sun political columnist Jon Ralston wrote two weeks ago that Republican Sen. Dean Heller, in a competitive race with Democrat Rep. Shelley Berkley, hasn’t yet used against her “what his team considers a potential silver bullet issue — Berkley’s vote for TARP, which for him polls off the charts….”
Ralston added in an e-mail Tuesday, “The Heller folks have long had polling data that TARP -- bailing out the evil banks -- is a potent issue. Heller voted against it (when he served in the House in 2008), so they think it is a contrast.”