Way back in May of 2009, I and other progressives said President Obama needed to fire Treasury Secretary Tim Geithner because he was either lying or incompetent when it came to AIG. Per the norm, we were lambasted as part of the supposed fringe for saying this, just as we were lambasted for saying that the no-strings-attached bailout was a blatant giveaway to Wall Street. Now, while I'm not going to say "I told you so," I will note it's become more acceptable to say Geithner must be fired - especially after a new report that Geithner's New York Fed instructed AIG to refuse to disclose to SEC regulators some of the worst financial shenanigans surrounding the AIG bailout.
As I'll show using characters from the movie Wall Street, this kind of thing makes Gordon Gekko and Bud Fox's shenanigans look petty.
For some history, the New York Fed, headed by Tim Geithner, bailed out AIG and then had the company famously pay back its creditors at 100 cents on the dollar. These creditors were huge banks that were taking big risky bets on mortgage-backed securities, and then buying "insurance" from AIG (more on this concept of "insurance" in a second) on potential losses on those bets. When the mortgage-backed securities lost their value in the housing bubble collapse and they called in their insurance, AIG was about to go under, until the New York Fed swept in.
If AIG had gone into bankruptcy like a normal corporation would have, there's little chance its creditors would have been paid back at 100 cents on the dollar. A bankruptcy judge or AIG shareholders/executives would have negotiated a much lower reimbursement rate. But because it was taxpayer money on the line, and because politically influential banks like Goldman Sachs can influence the government officials who made those reimbursement decisions*, AIG paid them in full with our taxpayer dollars. Put another way, the decision to pay back AIG's creditors in full with taxpayer cash was a massive giveaway/sweetheart deal to the big banks.
Well, you say, even if normal bankruptcy proceedings might not have paid back creditors at 100 cents on the dollar, ethically, shouldn't those creditors have gotten 100 cents on the dollar for an insurance policy? Well, maybe - if the insurance policy is real insurance. But what Goldman et. al bought from AIG wasn't insurance - it wasn't regulated like a regular insurance policy because it wasn't a regular insurance policy. It was simply another risky investment called a credit default swap that both the banks and AIG deceptively called "insurance." (The banks did this to allow them to show less risk on their books and thus be able to take more risk and AIG did this to sell more credit default swaps.) In fact, even calling Goldman and the other banks "creditors" of AIG isn't right - they were investors in AIG's risky schemes.
So, I'm sorry, no - when you take risks and then "cover" your risks by taking other risks, you aren't entitled - legally or ethically - to getting back 100 cents on the dollar on either set of risks. That's why they're called risks. Having the government pay out 100 cents on the dollar on those absurd risks is a taxpayer ripoff.
Now, if that sweetheart deal wasn't bad enough, we find out yesterday from Bloomberg News that the New York Fed instructed AIG executives to withhold information from the SEC about those sweetheart deals so as to prevent the public from finding out about them:
The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer's payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.
AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails (which you can see here), and AIG excluded the language when the filing was made public on Dec. 24, 2008.... The decision to pay the banks in full may have cost AIG, and thus taxpayers, at least $13 billion, based on the discount the insurer was seeking...
In a report published back in November of 2009, Treasury Inspector General Neil Barofsky said, "Federal Reserve officials provided AIG's counterparties with tens of billions of dollars they likely would have not otherwise received" and 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 government funds." Clearly the default position was the other way around - the New York Fed instructed AIG to hide damning information about public money from the public.
To understand how grotesque this really is, consider it in terms of the movie Wall Street, with Gordon Gekko as the entire AIG corporation. You can follow this simple metaphor one of two ways: First, simply imagine that Geithner - not Saul Rubinek - was the consigliere helping Gekko evade the SEC. Or, think of the end of the movie when the SEC is actively investigating Gekko. Imagine that when SEC investigators strung up Bud Fox with a wire, the New York Fed - another branch of government - strung up Gekko with a ear piece, with Geithner or one of his aides on the other end telling Gekko how to answer Fox's questions so as to not disclose damning information.
Was the New York Fed's behavior legal or were they encouraging AIG to commit a criminal fraud? I'm not a lawyer so I don't know - but it sure seems like it could be, or at least should be. Either way, it's appalling to learn that one government agency was actively encouraging a private corporation to withhold information from another government agency, so as to prevent the public from finding out information (in this case, a sweetheart deal to huge banks) about the public's money - information that would seriously piss the public off.
The same man who orchestrated this is now heading the Treasury Department - the agency that is supposed to also be regulating banks. This is far more than a fox-in-the-henhouse situation - this is a Gekko-in-the-Treasury situation. And if it's not grounds for firing Geithner, then there are really no grounds to fire any government official for anything.
* Remember, the CEO of Goldman Sachs - which desperately wanted AIG bailed out because a bailout would mean it would get reimbursed billions - was the only one in the room when Treasury Secretary Hank Paulson was helping make decisions about whether or not to bailout AIG.
Follow David Sirota on Twitter: www.twitter.com/davidsirota