Wall Street Triage: Was Lehman Sacrificed So That AIG Had To Be Bailed Out?

01/10/2010 02:49 pm ET | Updated May 25, 2011

To date, the American taxpayer has pumped $180 billion into AIG to spare it from becoming insolvent. A huge sum, especially in that many of these billions were used to pay down exotic derivatives to the likes of Goldman and a bevy of foreign banks. The derivatives were paid out at 100 cents on the dollar when their market value, before the government's intervention, was perhaps 40 cents, and probably a great deal less. Now we learn, through recent access to New York Fed documents and e-mails, that the New York Fed, at the time headed by Timothy Geithner, actively withheld details about those counterparty payments and "advised" AIG not to reveal the recipients or the counterparty billions disbursed. Only much later did a Congressional committee override the NY Fed's "guidelines' and force AIG to make this information public.

At the height of the crisis, Timothy Geithner was working in close tandem with then Treasury Secretary Paulson. Between September 18 and 21, 2008, Paulson called Geithner 28 times. Over a seven month period Paulson and Geithner spoke 416 times, whereas Paulson's contacts with Fed Chairman Ben Bernanke counted 286 calls.

Paulson was also in very close contact with Goldman Chairman Lloyd Blankfein, having had 19 telephone contacts with him over the period between September 18 and 21st alone. Geithner also had frequent phone contact with Blankfein.

Given the outcome of events -- the blow up of speculative mark to market derivative bets on housing mortgages, the billions at stake in counterparty obligations -- and given the direction and immensity of the government's support to AIG and who ended up being the ultimate beneficiaries, much still needs to be explained. To quote Edolphus Towns, Chairman of the House Committee on Oversight and Government Reform:

"More than one year after the first federal bailout of A.I.G., the American people continue to question where their tax dollars were really sent when the government rescued this company. I continue to believe that a comprehensive review of the rise and fall of A.I.G., and the involvement of counterparties can provide a useful vehicle to understanding how inadequate regulations, cheap money, risky business deals, and in some instances, corruption led to the current economic crisis."

The prospect that favoritism, collusive practices or outright corruption actually took place is exacerbated by the recent revelations that the Fed actively sought to hold back information on the billions of counterparty funds that went out of AIG's back door.

It raises the troubling question of whether the powers to be -- the Treasury and the New York Fed -- played a lethal yet clandestine form of Wall Street triage. To arrive at the point where AIG presented the government and the economy with a systemic risk of bringing down the whole system, could the scenario have been willfully orchestrated whereby everyone was too concerned or frightened to ask hard questions as billions were being dispensed to those with good friends in high places? The specter of disaster was ideally served by the bankruptcy of Lehman, which shook the financial world to its core. And to those who would have suffered billions of losses from an AIG bankruptcy, their exposure to Lehman obligations was as minimal as their exposure to AIG counterparty losses was great had AIG gone the way of Lehman. Lehman provided the ideal head fake, giving all that would be done to 'rescue' AIG an air of timely and necessary intervention.

But wait. Suppose all this was orchestrated first and foremost to spare the billions at risk by those holding AIG counterparty obligations. Would that not be tantamount to fraudulent conspiracy? Earlier in a post here, the question not asked was what were the context of the many phone calls between Hank Paulson,Treasury Secretary and former Chairman of Goldman Sachs, and Goldman Sachs Chairman Lloyd Blankfein, especially at the height of the dramatic events in Sept 2008? Was AIG discussed? Was counterparty exposure discussed? Was the bankruptcy of Lehman discussed? In what terms, and how much was communicated between the lines, the symbolic equivalent of nods and winks, given that both Paulson, with his prior association at Goldman, probably knew as much about Goldman's book as did Blankfein? All conspiracy theory, at worst? I would like to hope so, but with scores of billions at stake, funny things can happen.

These are all questions that should be asked both specifically and generally of the four poobahs, Lloyd Blankfein of Goldman Sachs, Jaimie Dimon of JP Morgan Chase, John J. Mack of Morgan Stanley and Brian T. Moynihan of Bank of America, appearing before the Congressional Financial Crisis Inquiry Commission later this week.

To quote Janet Tavakoli in the Huffington Post, " would be fair to make all of AIG's counterparties buy back the CDOs at full price and they can keep the discounted value themselves."

One last question. At Goldman, how were the year end bonuses impacted when including the profits generated by those traders who arranged the Fed's/AIG's buyback of those near worthless CDO's at full price, with taxpayers footing the bill??