When AIG failed, the New York Federal Reserve stepped in to manage the wind down of the counterparties to the insurance company’s massive credit default swaps (CDS) business. In short, the failure of AIG meant that they company couldn’t pay off all of the bets they lost in CDSs in the residential housing market. Faced with an AIG bankruptcy, the counterparties – all big Wall Street banks – were in a position where they might get none of the money they were owed. Since the government was stepping in to save AIG, it was an open question as to how much money would be needed to pay AIG’s counterparties. It was assumed that no one would be getting 100% of what they were owed, as AIG’s failure meant they would probably have received nothing. Basically anything that came from AIG after it’s failure was unexpected and largely undeserved money. The banks making swaps with AIG took risk when they made the bets and in the real world, but perhaps not the world of Wall Street, it’s actually possible to lose money when gambling. As Dean Baker notes, “the government bailout of A.I.G. ensured that [financial institutions] suffered no consequences from their mistake.”
The New York Times reports on a GAO study into the New York Fed’s behavior around the 2008 AIG bailout. The GAO found that the NY Fed, under Tim Geithner, basically refused to drive a hard bargain with the AIG counterparties and have lied about their actions.
The report, by the Government Accountability Office, says that New York Fed officials have offered inconsistent explanations for their decision to pay other financial companies the full amounts they were owed by A.I.G., and that some of the explanations were contradicted by other evidence.
The report also asserts that the decision to pay the full amounts, rather than seeking concessions as the government later did in other cases, disregarded the expectations of senior Fed officials in Washington and the expressed willingness of some of the companies to accept smaller payments.
Did you get that last bit? Geithner’s New York Fed even went so far as to turn down offers by banks to take less money than they were owed.
The AIG bailout was over $180 billion and, according to the Times, a quarter of that went to 16 Wall Street firms. To put it differently, money going to “save” AIG was being funneled straight to the people AIG owed money to…Wall Street banks like Goldman Sachs. The AIG bailout was a back-door bailout for the Wall Street banks which crashed our economy.
The GAO report suggests that this was done at the behest of Geithner’s New York Fed, somewhat autonomously from the national Federal Reserve. The New York Fed has not been honest with the government about what they did and the conditions they were taking action in. Whether that’s because Geithner’s NY Fed was genuinely ignorant of the market they were entering into or they just wanted to give as much money to their friends at big banks and are lying to cover it up, it’s not really clear.
But what is clear is that this is what a Tim Geithner orchestrated deal looks like: bailing out banks by preventing them from suffering losses that the market has suggested they should suffer. This is important for the current national mortgage/robosigning settlement talks with the nation’s largest banks, which are being lead at the federal level by Geithner and Geithner’s proxies and also include about 45 state attorneys general. By all accounts, the deal Geithner and the Obama administration are pushing looks awfully similar to the deal Geithner’s NY Fed orchestrated for AIG’s counterparties. That is, a sweetheart bailout for banks at the public’s expense. While this shouldn’t have been surprising prior to the GAO report on the NY Fed’s work around AIG, the desire to bail out banks for their liability connected to foreclosure fraud, securitization fraud, and origination fraud is exactly what we now know we will get when Tim Geithner is involved. It goes without saying that President Obama should fire Geithner.