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Miles Mogulescu Headshot

Should Obama Stop Trusting Geithner's Advice?

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Did Tim Geithner know in advance the amount of bonuses AIG paid to the executives of AIG's derivatives unit who designed and sold the financial insurance policies which helped bring down the global financial system? When did he learn about it and what did he do to try to do to stop it? Did he know that most of the bonuses were already paid last Friday, so that by the time President Obama went on television on Monday to denounce the bonuses and say that he would use every legal means to stop them, it was already too late to do anything about it?

Moreover, on the bigger issue of the $180 billion AIG bailout itself, did Geithner know last September (when he was still head of the New York Fed and helped engineer the AIG bailout along with Hank Paulson and Ben Bernanke) that the biggest recipient of AIG bailout funds was Hank Paulson's former employer, Goldman Sachs? And did he know that Goldman Sachs may have misled both the New York Times and Congress about it, deceiving the American taxpayers who were ultimately on the hook for the bailout funds?

The answers to these questions may go to Tim Geithner's very fitness to serve as President Obama's Treasury Secretary. Perhaps the only good that can come from the answers is if they cause President Obama to reconsider following Geithner's advice, including Geithner's private/public hybrid plan to rescue the banks (and their shareholders and bondholders), and instead consider Federal receivership of some of the largest insolvent banks.

First, the bonuses: When President Obama went before the American people on Monday, denounced the bonuses, and promised to "pursue every single legal avenue to block" their being paid, did Geithner know that most of the bonuses had already been paid the past Friday, making it all but impossible for the President to keep his promise? If Geithner knew, did he tell the President before the President spoke? If Geithner knew, but didn't tell the President, then he set the President up to mislead the public. If Geithner did tell the President beforehand, then the President participated in the deception. Either way, the President's credibility with the American people was damaged and Geithner deserves much of the blame. If the American people come to see the Obama administration as complicit in Wall Street's unethical behavior, then Obama's entire economic program could end up in shambles.

Second, the AIG bailout itself: The nearly $180 billion in government bailout funds to AIG and its counterparties dwarfs the $165 million in bonuses to executives of AIG's derivatives unit. Until two days ago, the identity of the AIG counterparties who received most of the AIG bailout money was kept secret from the public and Congress by AIG, the Fed and Geithner's Treasury Department. Only now do we learn that over $100 billion of the AIG bailout money was passed through AIG to some of the largest banks and financial institutions throughout the world. The largest tranche went to Goldman Sachs, which received $12.6 billion. Just as AIG's executives received their full bonuses, the AIG counterparties received full compensation for their potential losses in AIG, and were not asked by the responsible Federal Reserve and Treasury Department officials to share any of the losses with the taxpayers.

Who were the officials responsible for designing and implementing the AIG bailout? Tim Geithner (who, before he was Obama's Treasury Secretary was head of the New York branch of the Federal Reserve Bank); Fed Chairman Ben Bernanke; Bush's Treasury Secretary Hank Paulson (previously Goldman Sachs' Chairman). Moreover, according to the New York Times, also present at the key Federal Reserve meetings last September which decided to let Goldman Sachs competitor Lehman Brothers fail, but to rescue AIG, was current Goldman Sachs Chairman Lloyd C. Blankfein. According to the Times, Goldman Sachs was AIG's largest trading partner, and "a collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman's side." We now learn that Goldman received $12.6 billion from the AIG bailout (as well as tens of billions more from other Federal bailout funds.) But at the time, Goldman's spokesman claimed, apparently falsely, that "our exposure to AIG was, and is, not material." In February, the very same Goldman Chairman Blankfein denied to the House Financial Services Committee that Goldman had a major stake in bailing out AIG. It now turns out that AIG and Blankfein were not being truthful. Moreover, Geithner must have known they weren't being truthful and chose to keep it a secret from the American people and from Congress.

Former New York Governor Eliot Spitzer may have had his personal sexual indiscretions, but he remains well-tuned into to the financial indiscretions of Wall Street. Writing in Slate, he asks some scorching questions about AIG which he suggests should be answered in public, under oath, by Geithner, Bernanke, Paulson, and Blankfein:

"What was the precise conversation among Bernanke, Geithner, Paulson, and Blankfein that preceded the initial $80 billion grant?

Was it already known who the counterparties were and what the exposure was for each of the counterparties?

What did Goldman, and all the other counterparties, know about AIG's financial condition at the time they executed the swaps or other contracts? Had they done adequate due diligence to see whether they were buying real protection? And why shouldn't they bear a percentage of the risk of failure of their own counterparty?

What is the deeper relationship between Goldman and AIG? Didn't they almost merge a few years ago but did not because Goldman couldn't get its arms around the black box that is AIG? If that is true, why should Goldman get bailed out? After all, they should have known as well as anybody that a big part of AIG's business model was not to pay on insurance it had issued.

Why weren't the counterparties immediately and fully disclosed?

Failure to answer these questions will feed the populist rage that is metastasizing very quickly. It will raise basic questions about the competence of those who are supposedly guiding this economic policy."

No one is accusing Geithner of personal corruption or of trying to enrich himself. But his passivity in the face of the AIG bonuses, his willingness to pay AIG's counterparties 100 cents on the dollars, and his seeming complicity in the cover-up of Goldman Sachs' misstatements, indicate that he's far too close to Wall Street's special interests and far too out of touch with Main Street's concerns to serve Obama and the nation well.

Nowhere is this clearer than in his approach to the financial crisis which rejects government receivership of insolvent banks and instead provides government guarantees to hedge funds and private equity firms to buy toxic assets and prop up the management and shareholders of the private banking system. As Robert Kuttner points out, this approach may be in danger of leading Obama and the nation off a cliff.

If the questions regarding Geithner's recent actions leads Obama to reassess relying on Geithner's advice, and consider alternative plans to rescue the financial system, including putting insolvent banks under temporary Federal receivership, then it might end up doing some good.