Neil Barofsky Releases Report Critical of Geithner and NY Fed
It has not been a good couple of weeks for Treasury Secretary Timothy Geithner.
A report was recently released by special inspector general Neil Barofsky, who was charged with the task of reviewing the payments that were made with taxpayer dollars to counterparties of AIG at the height of the financial meltdown in 2008.
Were the payments nothing more than stealth bailouts for some of Wall Street's largest firms?
Did Geithner wilt under the pressure and back down to the likes of Goldman Sachs?
Should Geithner and the Federal Reserve Bank of New York have forced concessions from the counterparties to AIG instead of paying them out at 100 cents on the dollar and making them completely whole?
Geithner, who was head of the New York Fed at the time. agreed to pay the counterparties to AIG 100 cents on the dollar to "tear up their contracts". At the time, AIG was falling apart at the seams in the face of an epic meltdown of the financial system, and was forced to rely on an $85 billion dollar loan from the Fed to stave off bankruptcy.
Barofsky surmises that the fact that the government didn't let AIG slip into bankruptcy (as they did with Lehman Brothers), instead choosing to provide them with the massive $85 billion dollar loan, eroded any bargaining power that they may have had with the counterparties to AIG.
Fearful of another credit downgrade at AIG, and unwilling to force the company into bankruptcy, Geithner and the NY Fed reportedly decided that they would make all of AIG's counterparties whole, paying out 100 cents on the dollar. These banks (which included the likes of Goldman Sachs) were not willing to accept even a 2% haircut.
Following the release of this report, many have criticized Geithner for not taking a harder line with the banks and forcing concessions.
Many are of the opinion that Geithner's actions were influenced by the likes of Henry Paulson and William Dudley, who were both former employees of Goldman Sachs. At the time of the crisis, Geithner and then-Treasury Secretary Henry Paulson were working in lockstep to try and resolve the mess that had threatened to bring down the global economy. Paulson was the former Chairman and CEO of Goldman Sachs, holding those positions until he resigned in 2006 (to take the position of Treasury Secretary under George W. Bush).
Goldman Sachs, which could have been obliterated if AIG had been allowed to fail, received billions of dollars in taxpayer money, funneled through AIG, after Geithner and the NY Fed agreed to pay them out in full.
Since that point in history, Goldman Sachs has regained its strength and is poised to pay out tens of billions of dollars in bonuses in 2009, just one short year after nearly ceasing to exist, if not for the actions of the NY Fed and Tim Geithner.
Was the NY Fed really not in a position to demand concessions due to the fact that AIG was being propped up by the government?
Did these banks call the NY Fed's (and Geithner's) bluff, forcing the government to bank down at a time when the global financial system was in very real danger of collapsing?
Or did Paulson look out for the best interest of his old buddies at Goldman Sachs and make them whole, using Timothy Geithner as his pawn?
Conspiracy theorists are having a field day with this report, pointing out that this is clear evidence that the government is beholden to Goldman Sachs and not the citizens of the country.
Those who supported the 100% payouts argue that the government was forced into this position due to the fact that they didn't let AIG fail. and they they had no grounds to impose reduced payouts due to the fact that AIG hadn't declared bankruptcy. They also argue that a hardline on the payouts may have resulted in some of the firms sustaining fatal blows that they wouldn't have recovered from.
Was Geithner simply "weak" and unable to stand up to the consortium of banks who were standing firm in their goal of being paid out in full? Did the NY Fed and Geithner really have zero recourse, given that AIG was being propped up by the government?
Or was somebody in Geithner's ear?
Source: Washington Post - Fed Criticized For Not Negotiating Harder with AIG Creditors
Photo: U.S. Treasury
Filed under: General Market News