A brutal report issued Monday by a government watchdog holds Timothy
Geithner -- then the head of the Federal Reserve Bank of New York and
now the nation's Treasury Secretary -- responsible for overpayments
that put billions of extra tax dollars in the coffers of major Wall
Street firms, most notably Goldman Sachs.
The authoritative new narrative describes how, while bailing out
insurance giant AIG last fall, a team led by Geithner failed nearly
every step of the way.
Instead of bargaining with AIG's numerous counterparties to resolve
its billions of dollars in souring derivatives contracts, Geithner's
team ended up paying top dollar for toxic assets -- "an amount far
above their market value at the time," the report notes.
"There is no question that the effect of FRBNY's decisions --
indeed, the very design of the federal assistance to AIG -- was that
tens of billions of dollars of Government money was funneled inexorably
and directly to AIG's counterparties," the Office of the Special
Inspector General for the Troubled Asset Relief Program said.
Wall Street firms like Goldman Sachs, Merrill Lynch and Wachovia got
full value for their derivatives contracts with AIG, and taxpayers got
the bill. In total, $27.1 billion of public money was transferred to
companies that did business with AIG.
Throughout the bailout of AIG, the report says, the New York Fed
failed to develop appropriate contingency plans; failed to properly
assess the impact of its decisions; and generally engaged in
negotiation strategies that were doomed to fail.
Then, after Geithner's team paid off AIG's counterparties on Wall
Street, it imposed "onerous" terms on the troubled insurer, the report
"[T]he decision to acquire a controlling interest in one of the
world's most complex and most troubled corporations was done with
almost no independent consideration of the terms of the transaction or
the impact that those terms might have on the future of AIG," the
Geithner, now the nation's chief financial officer, just didn't
bargain hard enough with Wall Street's biggest companies, the report
[T]he 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. While there can
be no doubt that a regulators' inherent leverage over a regulated
entity must be used appropriately, and could in certain circumstances
be abused, in other instances in this financial crisis regulators
(including the Federal Reserve) have used overtly coercive language to
convince financial institutions to take or forego certain actions. As
SIGTARP reported in its audit of the initial Capital Purchase Program
investments, for example, Treasury and the Federal Reserve were fully
prepared to use their leverage as regulators to compel the nine largest
financial institutions (including some of AIG's counterparties) to
accept $125 billion of TARP funding and to pressure Bank of America to
conclude its merger with Merrill Lynch. Similarly, it has been widely
reported that the Government, while arguably acting on behalf of
General Motors and Chrysler, took an active role in negotiating
substantial concessions from the creditors of those companies.
Meanwhile, the Fed was attempting to keep the details of AIG's
counterparties hidden from public view -- another big mistake,
according to the report:
The now familiar argument from Government officials about
the dire consequences of basic transparency, as advocated by the
Federal Reserve...once again simply does not withstand scrutiny.
Federal Reserve officials initially refused to disclose the identities
of the counterparties or the details of the payments, warning that
disclosure of the names would undermine AIG's stability, the privacy
and business interests of the counterparties, and the stability of the
After public and Congressional pressure, AIG disclosed the
identities. Notwithstanding the Federal Reserve's warnings, the sky did
not fall; there is no indication that AIG's disclosure undermined the
stability of AIG or the market or damaged legitimate interests of the
counterparties. The lesson that should be learned -- one that has been
made apparent time after time in the Government's response to the
financial crisis -- is that the default position, whenever Government
funds are deployed in a crisis to support markets or institutions,
should be that the public is entitled to know what is being done with
While SIGTARP acknowledges that there might be circumstances in
which the public's right to know what its Government is doing should be
circumscribed, those instances should be very few and very far between.
READ the full report:
Huffington Post Business Editor Ryan McCarthy also contributed to this report.