for the benefit of the treasury, preferred stock convertible into 79 percent of aig ’ s outstanding common stock. federal reserve called together a private sector consortium made up of ltcm ’ s major counterparties, who agreed to rescue ltcm by investing about $ 3. 6 billion in new equity, in return for a 90 percent equity stake in ltcm ’ s portfolio along with operational control. the counterparties made this decision after the federal reserve encouraged them to recognize their self - interest in saving ltcm. the consortium invested in ltcm because its members came to believe that the federal reserve staff was right. several years later, when the investors received back all of their capital with interest, they came to see that the federal reserve was right. the market conditions in september 2008 presented a very different situation to aig ’ s counterparties who, in the aftermath of lehman ’ s failure, found themselves facing liquidity concerns that compelled them to maintain cash on their balance sheets rather than lend to aig. moreover, the unprecedented size of aig ’ s liquidity need – ultimately more than $ 150 billion – could not have been met by the private sector. there is, however, one very important similarity. we believe that we will receive full payment of principal and interest from aig, much like the consortium did in ltcm. still others have wondered why lehman went bankrupt, while the federal reserve extended credit to aig that prevented its default. the answer is that aig presented a very different case. aig had enough high - quality collateral to permit the federal reserve to extend a secured loan to provide liquidity to the firm. on september 16th, our focus was on providing liquidity so that aig could meet its obligations and avoid default. to be clear, we were not making an investment in aig ; we were making a fully secured loan. we were not assuming management responsibility for the company ; we were a lender to the company. the recently released volukas report shows in a thorough, exhaustive manner that an effective solution to lehman required a strong merger partner that could provide much needed capital to ensure a going concern. while federal reserve and treasury officials tried very hard to find that merger partner for lehman, in the end we did not succeed as we had succeeded in march of 2008, when we brought in jpmorgan chase to acquire bear stearns. as a liquidity provider, we did not consider conditioning our lending to aig on a requirement that the company obtain concessions

thomas c baxter, jr and sarah j dahlgren : the federal reserve bank of new york ’ s involvement with the american international group ( aig ) joint written testimony before the congressional oversight panel by mr thomas c baxter, jr, executive vice president and general counsel, and sarah j dahlgren, executive vice president, of the federal reserve bank of new york, washington dc, 26 may 2010. * * * chair warren and members of the panel, thank you for giving us the opportunity to testify here today regarding the federal reserve bank of new york ’ s ( new york fed ) involvement with aig. i. the decision to lend to aig on the morning of september 16, 2008, it became clear to federal reserve and treasury policymakers that aig, then one of the world ’ s largest insurance and financial firms, was facing a potentially fatal liquidity crisis. aig ’ s crisis was coming amidst the collapse of the housing market, within weeks of the receiverships of fannie mae and freddie mac, and within 24 hours of the bankruptcy of lehman brothers. confidence in the financial system was exceptionally fragile, and financial firms were taking dramatic and unusual measures to protect their balance sheets. money market funds, long viewed as a safe investment by millions of americans, were experiencing massive withdrawals. the run on these funds, in turn, severely disrupted the commercial paper market, a vital source of funding for american businesses. securitization markets started to seize up, especially those that relied upon instruments backed by consumer loans. banks sharply curtailed their lending. a full fledged panic had started and was spreading rapidly ; the financial system was facing the threat of collapse. in light of the circumstances at the time, a bankruptcy filing by aig would have had disastrous consequences. federal reserve chairman bernanke has stated that it could well have “ resulted in a 1930 ’ s - style global financial and economic meltdown, with catastrophic implications for production, income, and jobs. ” because of the decisions made that morning, we can never really know. let us be clear, though, about the risks that the policymakers did know. policymakers knew that aig ’ s largest creditors were other financial firms and that those firms clearly would have been directly impacted by an aig bankruptcy filing. but the gravest risks were not the direct exposure of other financial firms to aig. the gravest risks related to the indirect consequences of a bankruptcy of aig, indirect consequences that would impact millions of americans