The Full Story of How Tim Geithner Secretly Bailed Out Wall Street at Your Expense
When the historians finally finish sorting through the appalling decisions that have been made in the past two years, this one will probably be at the top of the heap.
Last fall, as AIG began to realize how screwed it was, it started negotiating with the counterparties to all the credit default swaps it had written. One of AIG's goals was to persuade these counterparties--including Goldman Sachs--to accept buyouts as low as 40 cents on the dollar.
Then Tim Geithner, head of the New York Fed, stepped in.
A few weeks later, the counterparties--all of whom voluntarily did business with AIG--were bailed out at par: 100 cents on the dollar.
Bloomberg has the whole sickening story:
By Sept. 16, 2008, AIG, once the world's largest insurer, was running out of cash, and the U.S. government stepped in with a rescue plan. The Federal Reserve Bank of New York, the regional Fed office with special responsibility for Wall Street [run by Tim Geithner], opened an $85 billion credit line for New York-based AIG. That bought it 77.9 percent of AIG and effective control of the insurer.
The government's commitment to AIG through credit facilities and investments would eventually add up to $182.3 billion.Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke's Federal Reserve. Geithner's team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps -- insurance-like contracts that backed soured collateralized-debt obligations...
Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar. The content of its deliberations has never been made public...
The New York Fed's decision to pay the banks in full cost AIG -- and thus American taxpayers -- at least $13 billion. That's 40 percent of the $32.5 billion AIG paid to retire the swaps. Under the agreement, the government and its taxpayers became owners of the dubious CDOs, whose face value was $62 billion and for which AIG paid the market price of $29.6 billion. The CDOs were shunted into a Fed-run entity called Maiden Lane III.
See also:
Tim Geithner, Don't You Dare Bail Out GMAC Again
New Home Sales Fall Off The Cliff
Goldman Issues Massive Rebuttal To Claims Of Market Manipulation
Follow Henry Blodget on Twitter: www.twitter.com/hblodget
Dylan Ratigan: Why Keep Geithner?
The current custodian of America's wealth, Treasury Secretary Tim Geithner, is not doing a good job. The time for corrective action is now.
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Geithner has always been too close to the bankers. He sees the world through their eyes. We need a Treasury Secretary who can see the world through the eyes of current and future taxpayers.
The reason AIG could bargain with counterparties was the threat of bankruptcy. Once the government decided to bail out AIG, the threat of bankruptcy became a worthless bargaining chip.
Say you a bookie $100,000. You have almost nothing, so you argue he should let you off for $10,000. He's a nice guy and sees your point, and asks for a few days to think it over. Suddenly a long lost aunt dies and leaves you a million dollars. How good is your $10,000 argument. Sorry Charlie, it's worthless.
If AIG, after getting an injection of government cash, decided to decided to stiff counterparties up to 60 cents on the dollar, all H would have broken loose. The notion that this delusion-based negotiation had legs is preposterous. Many counterparties had back-up CDS. They would have had zero reason to agree to a haircut, and there would been no way to force them to take a haircut. This scenario is a fantasy.
Beyond that it's absurd to think rescuing AIG would make a lick of sense if you in turn stiffed the counterparties. If stiffing the counterparties made a lick of sense, which it does not, then the best way to have done it would be to let AIG fail. Bingo, counterparties stiffed in full. The whole point in rescuing AIG was to prevent lethal (lethality is in what systemic damage results) damage to the counterparties.
Good analysis. Leaves us wondering why the government bailed out AIG when it was about to get a deal to stiff the banksters out of 40%.
a case of:...keep your friends close.. keep your enemies closer...
Who are the freinds and who are the enemies?
I am not sure that this is really a bad thing. In hind site sure it seems like it would be great to stick it to bankers but at the time if we would have stuck it to them we would either just have to bail them out more or maybe they would have gone under and sank the whole ship. I don't really think this is evidence of the banks running our government or any kind of conspiracy unless of course you consider the possibility that they were paid in full to do an end run around congress. But if that was the case I am glad they did it.
I think many people really believe that everything would be the same or better economically if AIG went under. Do you remember the talk when Obama first did the stimulus and extended TARP about the problem he'd have showing progress to the american people in the likely event those measures would only slow down and stabilize the crash? Well, here we are.
What I get out of this article is support for why Obama chose Geithner as Treasury Secretary. Both men were faced with a politically unpopular choice and made it in order to act quickly and not get stuck in congressional debate. The politically expedient decision would have been to get congress involved to share the reprecussions.
Imagine if Geithner had first gone to Congress for the authority to take over non-bank investment firms. AIG likely would have collapsed, with no legal way for the federal government ot enforce that bond insurance be paid in bankruptcy. Wall Street firms would have fallen like dominoes, taking municipal bonds, 401Ks and mortgages with them.
BO, I didn't notice you down here. As usual, much sensibly put than I put it. This is like opening up yet another chapter of Alice in Wonderland.
OK, the Wall Street firms were saved. But munis are still threatened and 401k's have tanked. And mortgages are still falling like dominos. Not as fast as if the Wall Street firms went down I will grant you. But the underlying damage to the Economy (not Wall Street) has not been fixed. That damage is realized in the form of manufacturing disruptions and permanent job loss that Wall Street will make up using globalization rebalancing. So what we have now is a slow motion collapse with the banks standing on the side lines indemnified by the Fed and waiting to buy up the domestic middle class infrastructure at penny's on the dollar. The banking establishment must then become an extension of government (an agency) as it serves a foreign capital base. This is an alternate America that the public will object to in many ways. This insures political turmoil in our future that will in itself reduce the value of banking instruments again and again. What have we wrought? When will the damage become clear enough for policy action aimed at repairing critical economic realities instead of technical banking fixes?
geithner and all of goldman need to be completely investigated and prosecuted for financial terrorism.
some of us have been screaming about this for years but the public prefers to keep their heads in the sand and hope it will all blow away.
as a critical pin-hole view into the world of NY finance manipulating our congress, administration, tax dollars and economy to their personal benefit read the 4/26/09 NY Times article "Geithner, Member and Overseer of Finance Club" By JO BECKER and GRETCHEN MORGENSON and the accompanying graphic "Mr. Geithner’s World."
http://www.nytimes.com/2009/04/27/business/27geithner.html?_r=1&em=&pagewanted=all
it's about time we all face up to facts and quit being cowed sheep. this is OUR country and OUR tax dollars being stolen in the greatest redistribution of wealth in history; UPWARD to the wealthiest few.
Geithner et al. need to be relieved of their positions in the administration and sent packing ...
Goldman-Sachs and others knew they were selling junk securities. That is why they bought SWAPS from AIG, whose commisioned salemen didn't know, or didn't tell their top management they knew. When the securities tanked Bernanke and Geithner deliberately stuck it to taxpayers, just as Brookley Born predicted. Geithner, Greenspan, Rubin, and Summers all conspired to get rid of Born so they could move forward with risky dergulation, which permitted them reap enormous personal profits.
People should be camped at their homes 24/7 in protest of their horrific behavior.
Excuse me, Treas. Secy. Hank Paulson, was heavily involved in this too. You remember him. He worked for years at Goldman Sachs, Huffpost's favorite strawman/bogeyman, and walked right into the Treasury Dept. I notice Wall St does protect it's own, you and Bloomberg. Somehow, Geithner did everything possible to mess things up. Paulson was completely innocent. Geithner probably did what he could since Paulson was running around to banks on wall st stuffing money into their hands. You remember him , right?? The man who wanted $700B to buy toxic assets from banks, got the money approved, and then decided to just give out cash instead. He was on TV all the time telling us how everything was going.
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