Barofsky audit a Fed, not Geithner, problem

November 17, 2009

Sure, Timothy Geithner led the negotiations with AIG counterparties when he headed the New York Fed last year, but TARP special inspector Neil Barofsky’s audit is damning where it really hurts the Fed. It raises the question of whether the central bank is a tough enough regulator at a time when Senator Christopher Dodd is calling for the Fed to be stripped of such power over big banks.

Big Picture has posted the report in its entirety.

It’s one thing to be a bad regulator during the boom years when, let’s face it, there were bad regulators everywhere. But to shrink from tough negotiations with banks during the height of the crisis when those banks were already benefiting from billion of dollars in state aid will be harder to explain away, though the New York Fed has tried.

From the report:

FRBNY’s decision to treat all counterparties equally (which FRBNY officials described as a “core value” of their organization), for example gave each of the major counterparties (including the French banks) effective veto power over the possibility of a concession from any other party…

It also arguably did not account for significant differences among counterparties, including that some of them had received very substantial benefits from FRBNY and other Government agencies through various other bailout programs (including billions of dollars of taxpayer funds through TARP), a benefit not available to some of the other counterparties (including French banks)…

…the refusal of FRBNY and the Federal Reserve to use their considerable leverage as the primary regulators for several of the counterparties, including the emphasis that their participation in the negotiations was purely “voluntary,” made the possibility of obtaining concessions from those counterparties extremely remote.

Sure, it’s a fine line of when to use such leverage, but the report goes on to note that the Fed didn’t shy away from using it when, for example, it and Treasury compelled banks to take TARP funds. Similarly, the government played hard core with General Motors and Chrysler creditors when the automakers barreled toward bankruptcy.

The conspiracy theorists are sure to jump on the below.

There is no question that the effect of the FRBNY’s decisions – indeed, the very design of the federal assistance to AIG – was that tens of billions of Government money was funneled inexorably and directly to AIG’s counterparties.

I don’t think the Fed and Geithner set out intentionally to save AIG so banks would get paid,  but their unwillingness to play hardball is damning and undermines the argument that the Fed is tough enough to regulate the now even bigger, and more powerful Wall Street banks.

The Fed did an incredible job navigating the credit crisis. It may have come late to the game, but it moved quickly to soften the blow of the financial markets’ implosion. But if it wants to continue being regulator-in-chief of the bank holding companies, it better show that it has the chops and fast.


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