Thursday, January 07, 2010

Geithner cover-up disclosed (with two updates)

The economic blogosphere is lighting up with new revelations about the bank bailout. Emails obtained by the House Oversight and Government Reform Committee show that the New York Federal Reserve, under the direction of now-Treasury Secretary Timothy Geithner, told AIG to keep secret the size of its insurance payments to major banks. (Bloomberg was first to report the story. Worthwhile blogger responses can be found here, here and here. There will undoubtedly be others and I will add more if they add to the discussion.) These payments were made after AIG had, in effect, been nationalized by the federal government.

Over a dozen institutions, including Goldman Sachs and several European banks, were paid 100 cents on the dollar for credit-default swaps (CDS) issued by AIG to insure billions of dollars worth of mortgage-backed securities (MBS). The value of these securities dropped dramatically in the real estate collapse. AIG could not have made good on the CDS claims banks would have made on it, resulting in huge losses for them. To prevent this, billions of dollars were poured into AIG via TARP thus enabling full payment to the banks. Thus the banks losses were transferred to AIG and then to the federal treasury—in effect, a backdoor bailout. It was the size of these payments which were suppressed.

This story has legs. Barney Frank is already supporting congressional hearings to investigate. There could be indictments of NY Fed officials but questions will undoubtedly be asked whether direction for this cover-up came from Treasury officials in Washington. Calls for Geithner’s resignation are also being heard. It is very possible this time that he will oblige as this could become a major distraction for the Obama administration. The assumption in Washington seems to be that, as of now, the public cannot handle a full disclosure of the government’s role in the 2008 financial crisis. Until a thorough investigation takes place, we will have to make do with revelations in this drip-drip fashion

Update: Here are three commentaries from Huffington Post. One is from the Rep. Darrell Issa who obtained the emails, another is from a trio that includes former NY Attorney General and Governor Eliott Spitzer, but the best may be by columnist/author David Sirota.

Update 2: The story of AIG, like nearly every aspect of the financial crisis, is an octopus with tentacles reaching in all directions. The mainstream media (MSM) does a poor job of "connecting the dots" (to use a popular phrase from another context) and obviously those who created the mess don't want the dots connected. Independent of today's story above, Bloomberg commentator Jonathan Weil asks about the shenanigans involved in hiding the fact that AIG is, in fact, bankrupt. Again, government agencies are directly involved and of greater concern, Weil says, is that this charade really permeates the whole financial system. Tyler Durden at Zero Hedge, in his reaction to Weil's piece ("AIG Has Become A Figurehead Of All That Is Broken In America"), concludes with this lament:

"Moral hazard reigning supreme, regulatory capture, incompetence, misdirection, and outright fraud, auditor complicity, broken equity markets, and an administration whose only answer to every problem is to stuff it ever deeper under the carpet and throw ever increasing amounts of money... This is what this once great nation has become."

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