Geithner’s faulty apologia

Jan 28, 2010 00:16 UTC

Tim Geithner’s appearance in front of Congress today was another embarrassment, perhaps more for the people’s representatives than the Treasury Secretary. Still, Geithner offered a clumsy defense for paying out 100¢ on the dollar to AIG’s counterparties, which included more than Goldman Sachs.

What they lacked in knowledge and nuance, Congress made up for in volume and OUTRAGE. The worst moment I saw was the utterly bogus comparison by Rep. Stephen Lynch between AIG’s payout to Goldman (100¢ on the dollar!) and the bailout offer for Bear Stearns shareholders (only $2 per share). 100 is a bigger number than 2, you see.

Geithner was lucky to be doing battle with such an unprepared, unimpressive group.

His defense, such as it was, amounted to the following:

Had the Fed imposed haircuts on AIG counterparties, it would have led to AIG’s credit rating being downgraded and the company (and consequently the economy) would have collapsed.

But AIG had already been downgraded, that’s why the government stepped in with a bailout. At that point the firm’s liabilities were taxpayer backed, so it strains credulity to say that extinguishing certain CDS it had written would cause systemic fallout in and of itself. Essentially what was happening here was unused insurance contracts were being extinguished. (Imagine a pro-rata refund from your insurer for a homeowner’s policy it wants to cancel…)

And there was precedent for this kind of negotiation. Eric Dinallo, former Commissioner of the NYS Dept. of Insurance and current candidate for Eliot Spitzer’s old job, had previously negotiated haircuts on CDS written by the monoline bond insurers. They were never forced into a taxpayer bailout. Did anyone at the Fed pick up the phone to consult Dinallo? Why not?

At the hearing, Geithner said he took “great pride” in his judgment to pay out 100¢ on the dollar to AIG counterparties because, he claims, it saved us from economic catastrophe.

No doubt the system was on the verge of collapse. But the biggest threat was undercapitalized banks. The payout to AIG counterparties was just a backdoor bailout for them. As Dan Alpert of Westwood Capital points out:

Every dollar of [haircut] would…amount to a dollar less of capital on bank balance sheets today (actually more, because in the interim the affected banks made money with that capital). If the discount was more than a little, some of the institutions would have required “front door” bailouts, or would have failed.

That’s why everyone is still so angry about this, and Goldman’s ridiculous claims that it would have been fine even absent the $12.9 billion it received from taxpayers via AIG. Sure, they’ve paid back TARP. But here’s another $12.9 billion of your money that’s helping to fund their bonus pool.

Jim Rickards offers a good closing thought on the matter:

What was actually done [in the AIG bailout] shows a breathtaking lack of imagination and legal skill on the part of the people involved.  The Fed and Treasury do have an obligation to save the system, but they have no obligation to save each and every member of the system.  That’s a big difference.  You may need to build a firewall but it’s important to build it in the right place.  Makes sense to protect the little guy but where was the national security interest in protecting Goldman? This is why I am just speechless when I hear Geithner testify that though he was utterly surrounded by ex-Goldman people they somehow had NO IMPACT on his judgment to save Goldman.  How blind and unaware can you be?

Not so blind that you can’t be Treasury Secretary…

COMMENT

It’s one thing to make a boneheaded decision. It’s another to repeatedly lie about it under oath. Time for Beavis to resign.

Posted by Fielding Mellish | Report as abusive

Grist for Goldman conspiracy theorists

Nov 24, 2009 13:33 UTC

From Yves over at NakedCapitalism:

A former managing director at monolines Ambac and FGIC wonders why AIG was bailed out but the monolines weren’t. (He admits to bias, so take this with a grain of salt.)

…the [AIG] bailout was prompted by fear mongering and deliberate strategies and manipulation on the part of Goldman and a few select others, to make sure that AIG would be bailed out to protect their trades in shorting ABS CDOs.

I believe that John Paulson benefited from this bailout, on his $5 billon or so of ABS CDOs with AIG. But not as much as Goldman benefited themselves, via Abacus and, perhaps, other deals.

AIG, Goldman and ABS CDOs were tied together at the center of the crisis. From Goldman’s perspective, all of the other participants were secondary – they had no exposure to the monolines and they were probably hedged against the other banks. The only loose end was the collateral posted by AIG.

The final question that this raises for me: would it have been cheaper for the government and the taxpayer to have bailed out the bond insurers instead of AIG? The total amount of CDOs and credit default swaps that would have needed to be guaranteed would have been smaller. In the number of investors across the market that would have benefited would probably have been larger. The auction rate securities market, the muni market, the investors that held bond insurer exposure to MBS and ABS would have all benefited. None of these markets were aided by AIG’s bailout.

But a bond insurer bailout would not have helped Goldman much and the AIG bailout did.

There’s much more in the post. As chairman of the NY Fed, former Goldman CEO Stephen Friedman was in an opportune place to scare Tim Geithner into bailing out AIG to benefit Goldman.

The Paulson connection is intriguing. I’ve always wondered who, ultimately, was on the other side of his “trade of the century.” He bought CDS and the banks he traded with had to lay off that risk to someone. That someone was AIG, which couldn’t have paid up if not for the bailout….. (admittedely, this is supposition on my part, would be interested to hear reader thoughts…)

COMMENT

The average pay (including bonus and benefits) for GS staff is approximately $770,000 – almost doubles the salary of US President.

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