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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
billion in losses relating to the securities-lending business’s mortgage-backed pur-
chases. Along with the losses, Sullivan announced Cassano’s retirement, but the news
wasn’t all bad for the former Financial Products chief: He made more than mil-
lion from the time he joined AIG Financial Products in January of until his re-
tirement in , including a million-a-month consulting agreement after his
retirement.
In March, the Office of Thrift Supervision, the federal regulator in charge of regu-
lating AIG and its subsidiaries, downgraded the company’s composite rating from a
, signifying that AIG was “fundamentally sound,” to a , indicating moderate to se-
vere supervisory concern. The OTS still judged the threat to overall viability as re-
mote. It did not schedule a follow-up review of the company’s financial condition
for another six months.
By then, it would be too late.
FEDERAL RESERVE:
“THE DISCOUNT WINDOW WASN’T WORKING”
Over the course of the fall, the announcements by Citigroup, Merrill, and others
made it clear that financial institutions were going to take serious losses from their
exposures to the mortgage market. Stocks of financial firms fell sharply; by the end of
November, the S&P Financials Index had lost more than for the year. Between
July and November, asset-backed commercial paper declined about , which
meant that those assets had to be sold or funded by other means. Investment banks
and other financial institutions faced tighter funding markets and increasing cash
pressures. As a result, the Federal Reserve decided that its interest rate cuts and other
measures since August had not been sufficient to provide liquidity and stability to fi-
nancial markets. The Fed’s discount window hadn’t attracted much bank borrowing
because of the stigma attached to it. “The problem with the discount window is that
people don’t like to use it because they view it as a risk that they will be viewed as
weak,” William Dudley, then head of the capital markets group at the New York Fed
and currently its president, told the FCIC.
Banks and thrifts preferred to draw on other sources of liquidity; in particular,
during the second half of , the Federal Home Loan Banks—which are govern-
ment-sponsored entities that lend to banks and thrifts, accepting mortgages as collat-
eral—boosted their lending by billion to billion (a increase) when the
securitization market froze. Between the end of March and the end of December
, Washington Mutual, the largest thrift, increased its borrowing from the Federal
Home Loan Banks from billion to billion; Countrywide increased its bor-
rowing from billion to billion; Bank of America increased its borrowing
from billion to billion. The Federal Home Loan Banks could thus be seen as
the lender of next to last resort for commercial banks and thrifts—the Fed being the
last resort.
In addition, the loss of liquidity in the financial sector was making it more diffi-
