If you look coming out of the Depression, the massive changes in government regulations and in government agencies and institutions, it took a long time for those to all form and for the market to adjust to those new realities. So, I don't have a good lens into what that's going to look like. I do know it's going to be different.
Questioner: You talked about the TARP having strong protections on executive compensation. How does AIG figure into that? Weren't there $400 million worth of bonuses paid out there?
Kashkari: Sure. The bonuses paid in terms of AIG, which got so much attention, were entered into in iron-clad contracts in the spring of 2008, six months before, or longer, before the federal government got involved in AIG. Now, we didn't have the legal authority to tear up contracts. All right? We're a country of laws. The sanctity of a contract is the bedrock of our capitalist system that has really differentiated the U.S. relative to other countries that investors could invest in.
Now, I talked about something called "receivership." When an individual bank fails, a small bank -- a thousand little banks failed in the S&L crisis in the late '80s, early '90s. The FDIC comes in and puts the bank into receivership. And that is a legal framework, under which the FDIC can then repudiate contracts. It can decide, "We're going to pay this contract. We're going to pay you this amount or this amount. We're going to honor these. We're not going to honor these." For these large global institutions like AIG, or like Citigroup, that are these big global bank holding companies, there's no receivership authority. So, one of the things that the new -- the current administration is asking for, and Secretary Paulson and Chairman Bernanke asked for it last year, was new authority to put these big global bank holding companies into receivership, to give us these tools. The problem with having to intervene to stabilize an institution when you don't have this legal authority, you don't get to pick and choose which contracts you want to honor.
If we went into AIG and said, "We're going to just arbitrarily tear up certain contracts because we feel like it," those creditors could then put the company into bankruptcy. They'd have the legal ability to do that. And that would undermine the very stability that we're looking to achieve. So, we did put in place strong executive compensation requirements. Congress passed -- part of the TARP legislation required us to. But again, it did not go back and retroactively try to change contracts, because our system is built on the sanctity of contracts.
Question: We work closely with ABS Funds trying to raise capital for investment in vintage mortgage-backed securities. One question that we typically face from investors is, the bedrock of investor confidence is usually placed within the pooling and servicing agreement that was entered into. And with increasing activity in the loan modification space, it's becoming very unclear as to how investor interests are protected, while borrower loans are actually modified. What do you see as a road map to protect investor interests in securities investment that they entered a long time ago but their loans are being modified at the back end? And, you know that the investors can be anywhere in the globe right now, not just in the U.S.
Kashkari: Just to give some context for everybody, all these home loans are packaged into mortgage-backed securities. You have your different tranches...Triple-A, all the way down. And there are these pooling and servicing agreements, which tell the services who collect your loan payments how you're supposed to interact with the borrower. So, if a borrower falls behind, here's what you're supposed to do to try to maximize cash flow. Now, the servicers are trying to maximize cash flow for the investors in the aggregate. They're not supposed to be picking and choosing which tranche of investors to be favoring. They're supposed to be acting on behalf of all of them. The loan modification programs that have been designed that I've worked on are designed to try to help home-owners who want to stay in their home and have a reasonable chance of staying in their home.
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