The tactic would have undercut our primary goal in providing AIG with necessary liquidity – enabling AIG to pay creditors, maintain consumer, regulator, and counterparty confidence, and avoid default. A default would have triggered AIG’s bankruptcy, with all of the systemic risk that bankruptcy would have entailed. While these tactics have been used in certain sovereign debt restructurings, they can be used there only because sovereigns cannot go bankrupt, and only with months of pre-planning. Any attempt to condition our lending would have created further uncertainty in a time of panic as to which of AIG’s counterparties would get paid and which would be forced to take substantial losses. One of our objectives was to calm market participants, and uncertainty (and the allegations of favoritism that surely would have followed) does not do that – it fuels fear. Would the conditions extend only to AIG’s Credit Default Swap (CDS) counterparties, or might the Federal government make value judgments as to other AIG contracts? Would senior unsecured debt holders be forced to take concessions? And most importantly, would a creditor who was pressed for a discount simply refuse and declare a default? Conditional lending would have heightened the risk of an AIG default, which is what we were trying to – and did – avoid. The default risk would have been exacerbated by the credit rating downgrade that almost certainly would have followed any effort by AIG to coerce creditor concessions.
The first is an internationally agreed standard on the total loss absorbing capacity (or TLAC) that globally systemic banks must hold. It will be based on clear principles. But it will be much more than a list of aspirations. It will include a detailed indicative term sheet that will cover the amount; the type, and the location of that loss absorbing capacity. It will establish a level playing field between global systemic banks, while taking into account differences in national resolution regimes. It will ensure globally systemic banks finally have the quantum of total loss absorbing capacity that extensive analysis show balances the benefit of greater resilience against the higher funding costs for the banks that results from the removal of public subsidies. It will set clear roles for home and host regulators in a resolution. It will give host nations the confidence that they won’t again be side-swiped by the failure of a large foreign bank. And, by removing the implicit subsidy that systemic banks have long enjoyed, it will reestablish market discipline. Once implemented, it will make our financial systems more resilient and our economies stronger. The proposal will be subject to a rigorous consultation and Quantitative Impact Study and market survey in 2015 and will take into account insights from the FSB’s ongoing Resolvability Assessment Process for every systemic bank’s resolution plan. The TLAC agreement will be complemented by another agreement just announced yesterday.