Geithner Backstairs Intrigue Awarded $13 Billion Directly to Goldman Sachs, Merrill Lynch (RIP), Société Générale and Deutsche Bank

Here's something Goldman Sachs, Treasury Secretary Tim Geithner, Federal Reserve Chairman Ben Bernanke, American International Group's former CFO, and Goldman's former chairman have all declined to comment on:

While negotiating how much loss large banks would have to take on credit default swaps with the bankrupt insurer AIG, the New York Fed, then under Geithner, rejected a 40 cents-on-the-dollar deal in the works and made taxpayers pay at least $13 billion to ensure the banks suffered no losses:

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.

CDOs are bundles of debt including subprime mortgages and corporate loans sold to investors by banks.

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.

Full, excellent story by Bloomberg's Richard Teitelbaum and Hugh Son.

I'm not sure this stuff counts as an outrage anymore. After all, $13 billion is range-finding to these guys. Maybe 2009 1040 forms should have a special checkbox to send a strippergram to Geithner to thank him for saving us so much money.