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January 07, 2010

Oh My: Geithner Told AIG to Lie to Public About "Backdoor Bailout" of Big Banks and Investment Houses Through AIG

The government was trying to bail out AIG, to keep the mega-insurer from going down, which could (maybe) bring down the financial system for a year or two.

AIG was loaded up with obligations it could not possibly meet. It had insured all those subprime mortgages, figuring that only a fraction of them could go bust at any particular time, which was a gross miscalculation, as it turns out.

They also had a lot of credit-default swaps, which, I'm not going to lie to you, I don't know really what they are. Except you don't want to have a lot of those on your books as the system comes crashing down.

So here is the malfeasance: AIG paid other banks 100 cents on the dollar -- that is, full freight -- for their own credit default swaps, which were now either worthless or worth pennies on the dollar.

Why would AIG do this? Why would it put out good, hard cash to get back virtually worthless paper? And why in the hell would you want to saddle a company which was already insolvent with even more insolvency-creating bad paper? All the while pumping its cash (cash from the government, of course) right out the door?

Well, the government -- or more specifically, Tim Geithner -- seems to have instructed them to do so as a requirement for continuing government assistance. And he instructed them not to disclose such 100-cents-on-the-dollar swaps to the public.

Here's my possibly naive belief: In this sort of situation, you want the bad paper spread out among as many actors as possible. That way everyone takes a loss -- takes a haircut -- but it's not necessarily anything that most companies can't bear, that will put them under. It just might give them a few lean years. But the system -- the thing we're trying to keep intact -- continues on, bruised and battered but still alive.

So why was all this bad paper being sucked into one company? Well, that one company was The Big One as far as bailouts, and it was the one the government was acknowledging trying to save.

Why was this extraordinarily generous 100-cents-on-the-dollar backdoor bailout offered to banks like Goldman Sachs? To the extent you're bailing them out -- why not something that makes a lot more sense like 60 cents on the dollar? Why so generous -- careless -- with taxpayer money?

Is it necessary that Goldman Sachs not even take a haircut -- not even lose some profitability or the ability to pay huge bonuses -- for a year or two?

No. Or at least it doesn't seem so to me. Even if I accept that some bailing out is necessary or prudent, what the hell is this crap with the full-on 100-cents-on-the-dollar complete immunization of Goldman Sachs against its extraordinarily bad decisions, all on the taxpayer dime?

Well, you can maybe see why Geithner demanded this be illegally withheld from the public, from stockholders, for example, who had a legal right to an accurate accounting of where AIG's money was coming from and where it was going. If you make it known to them, the public is informed, and then people start to get very annoyed that Goldman Sachs and other mega-banks aren't even being asked to take a 30% haircut on one portion of their accounts.

And that the American taxpayer, meanwhile, is being shellacked for the full cost of this.

This was kept illegally secret from the public because the public would never have blessed it had they known about it. Actually, the public never really blessed any kind of financial sector bailout, but they seemed to accept, reluctantly, the version of it they were sold on; but they never, in a thousand years, would have accepted this grotesquery had it been revealed to them.

So, here is the story:

The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.

AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008. The e-mails were obtained by Representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee.

The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps, which were contracts tied to subprime home loans, threatened to swamp the insurer weeks after its taxpayer-funded rescue. The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the swaps, prompting lawmakers to call the AIG rescue a “backdoor bailout” of financial firms.

“It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information,” said Issa, a California Republican. Taxpayers “deserve full and complete disclosure under our nation’s securities laws, not the withholding of politically inconvenient information.” President Barack Obama selected Geithner as Treasury secretary, a post he took last year.

As you know, I'm not a conspiracy-type guy, but this is, in fact, a conspiracy.

As they say, every profession is a conspiracy against the laity; those on the inside of the profession, of course, always have a conspiracy of shared interest in advancing their own collective cause against every one else's interest. Geithner -- and maybe his boss, Bernacke; who knows about him -- seems to have joined this conspiracy gladly and made sure his friends, and his likely future employers, did not, as the rest of America was expected to do, suffer at all for these catastrophically bad decisions.

Perhaps there's a good, sensible explanation for all this besides just keeping Goldman Sachs in the black, black, black (and pumping out millions of your money in undeserved bonsues).

Maybe I could even be persuaded, had I heard the explanation.

But I never did hear it. They just kept it illegally secret from me. Because the easiest way to "explain" a sketchy action is just to keep it secret from the person to whom an explanation is due. Ask any cheating spouse about that -- it's a no-brainer.

Just to Reiterate: Let's say I accept I want to keep these companies solvent.

Does that mean I want to keep them profitable? As profitable as ever?

No, I don't. Put aside moral considerations -- in pure economic terms, I want them to suffer, to keep them from doing this again, to keep them honest, as it were, and to keep them from thinking I'll always be there to write them a check if they risk too much.

Their profits are private; their losses are socialized. What?

A lot of people are losing money in this recession. A lot of companies have gone under; many are just barely keeping their doors open.

Why in the hell are the people most responsible for this disaster being immunized completely from their catastrophically bad decisions? Why are those harmed by their decisions being asked -- did I say asked? No asking was involved; they just did it secretly -- to subsidize those who caused all the problems?

Goldman Sachs and all the others should have had at least three years of losses and at least three years without bonuses. At least. Keep them from going under completely I understand.

Keep them from even having a year of losses? No, sorry, I don't understand that.

Which is why, I suppose, Geithner kept this secret from me.

Thanks to AHFF Geoff.

Counter-Argument: Spongeworthy sends this post by Megan McArdle, making (or at least stating) the case that Goldman Sachs didn't have to agree to any haircut at all, and could have just pushed to get 100% reimbursement.

Okay, I have duly linked that. I do not, however, believe it. If you know that pushing your claims 100% will drive a firm under (and you might wind up getting very little out of it), you don't push your claims 100%.

Sponge -- and I think Holdfast too -- are saying that the government had no leverage because it was known that they wouldn't let AIG go into bankruptcy under any scenario, so they couldn't get tough with Goldman et al.

Eh. I don't know. These guys sure seemed to be able to boss companies around. If I'm remembering right, there was also some chicanery like this involving another bank.

digg this
posted by Ace at 02:45 PM

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