Monetary Policy

Corruption, Panic and Incompetence Fueled Geithner's Backstairs Intrigue


Fire Geithner now!

Reason readers learned a few weeks ago about then-President of the Federal Reserve Bank of New York Tim Geithner's role in crafting a full-payment deal for big banks that had credit-default swaps with the failed AIG insurance company. As Radley Balko noted earlier, Neil Barofsky, special inspector general for the federal Troubled Asset Relief Program, has now issued a harshly critical report on Geithner's handling of the AIG bailout.

Barofsky's report [pdf] details how the bailout vehicle "Maiden Lane III" was created, and why Geithner quickly decided to pay 100 cents on the dollar to AIG counterparties—including Goldman Sachs, Deutsche Bank, and others. (Go to page 23 for the full list.) The deal ended up costing taxpayers at least $13 billion.

The slightly good news for Geithner is that the SIGTARP report somewhat mitigates earlier claims by former AIG employees that the decision to pay the banks in full was a high-handed action by the New York Fed president. The decision to concede to the banks' demand for full payment originated with unnamed other officials at the Fed. "Mr. Geithner concurred," the report reads, "and it was decided that FRBNY would cease efforts to negotiate haircuts and pay the counterparties the market value of the CDOs."

Barofsky repeatedly refers to the panic Treasury and Fed officials were feeling about a "systemic" collapse in the financial markets, but he never endorses their view:

Federal Reserve and Treasury officials believed that AIG's failure posed considerable risk…

[O]fficials believed that an AIG bankruptcy could ultimately have a greater systemic impact than Lehman's bankruptcy one day before…

[O]fficials believed that AIG's failure posed considerable risk to the entire financial system…

Even more striking, Barofsky casts major doubt on Geithner's claim that his efforts were not designed to keep big banks happy:

Geithner and the BRBNY General Counsel told SIGTARP that the financial condition of the counterparties was not a relevant factor in the decision to create Maiden Lane III and pay counterparties effectively at par.

This is an absurd statement: If the financial condition of AIG's counterparties was not a relevant factor, where was the systemic risk coming from? Were AIG losses going to leapfrog Goldman and land right on First Bank of Podunk? Barofsky initially lets Geithner get away with this lie, but later he repeats the claim and undercuts it with a directness that is rare in official documents like this one:

Then-FRBNY President Geithner and FRBNY's general counsel deny that this was a relevant consideration for the AIG transactions. Irrespective of their stated intent, however, there is no question that the effect of FRBNY's decisions—indeed, the very design of the federal assistance to AIG—was that tens of billions of dollars of Government money was funneled inexorably and directly to AIG's counterparties.

The SIGTARP report also spells out how the AIG bailout was set up in a way that guaranteed the program would fail to protect taxpayers:

The Federal Reserve Bank of New York was confronted with a number of factors that it believed limited its ability to negotiate reductions in payments effectively, including a perceived lack of leverage over the counterparties because the threat of an AIG bankruptcy had already been removed by the FRBNY's prior assistance to AIG.

The takeaway?

FRBNY did not develop a contingency plan; when private financing fell through, FRBNY was left with little time to decide whether to rescue AIG and, if so, on what terms… Not preparing an alternative to private financing, however, left FRBNY with little opportunity to fashion appropriate terms for the support, and believing it had no time to do otherwise, it essentially adopted the term sheet that had been the subject of the aborted private financing discussions… In other words, the decision to acquire a controlling interest in one of the world's most complex and most troubled corporations was done with almost no independent consideration of the terms of the transaction and the impact that those terms might have on the future of AIG.

And the punchline:

FRBNY officials state that they believe they will recoup the loan they made to Maiden Lane III over time…

Back when Geithner's deal for the banks first came to light, the blogger Tom Maguire said there was nothing scandalous in the decision to honor AIG's contracts in full:

The lesson is, if a government that values its credibility and hopes to avoid a panic promises to protect creditors, it pretty much has to do just that.  Quel surprise.  The same logic—a deal is a deal and contracts count—led to the government paying out on the controversial AIG bonuses.  It is easy enough not to like that outcome, but having a government that could tear up contracts at random would probably be worse.

I agree with most of this statement (except that surprise is feminine), but that's why the Fed and the Treasury should never have gotten involved in an area (insurance) that was outside their purview, to prevent a bankruptcy that would have solved all the problems Maiden Lane III made worse. Had AIG been allowed to fail, the damage would not have been sustained by this "system" we keep hearing about. It would have been limited to the willing signatories of a business deal. Barofsky's thorough dismantling of Geithner's logic, and his silence on the matter of how much reality there was to the Paulson-Bernanke-Geithner hysterics, just point up what a swindle the AIG bailout really was.

Tim Geithner needs to be fired. He needs to be fired in 2008, and he needs to be fired even more in 2009. Any fair reading of the SIGTARP report leads to the conclusion that he lacks the competence, the honesty and the moral character to run the Treasury of the United States. Unfortunately it's hard to fire a man for things he did before you hired him. But lucky for us, Geithner is providing new examples every day.

NEXT: Yes, We Have Reached Our Goal of 500 New Donors, You Glorious Sons and Daughters of Bitches! Now Fill the Goddamn Torch With The Fire of Liberty Because We're Committed Through The End of The Week!

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  1. They were trying to avoid a “disorderly” bankruptcy…

  2. The decision to concede to the banks’ demand for full payment originated with unnamed other officials at the Fed. “Mr. Geithner concurred,”

    That Geithner’s head is not prominently displayed on a pike in front of the smoking ruins of the Federal Reserve is clear evidence that our Civilization is in a profound, steep decline.

    1. Tim Geithner needs to be fired. He needs to be fired in 2008, and he needs to be fired even more in 2009.

      See above comment.

      Firing is too good for him. He should have plenty of company in the burnt and salted field of head-bearing pikes too.Some of them more prominent “household names”

    2. Oh, I’m Illuminati!
      Yes, I’m Illuminati!
      I can be nice or naughty!
      ‘Cause I’m Illuminati!

    3. Tell me how TG is not exactly equivalent to any and every self serving and corrupt bureaucrat we are supposed to despise in a typical dystopian novel or how he is not equivalent to bureaucrats we were supposed to be horrified by during the heyday of the Soviets. Tell me how we (editorially speaking) have not become everything that we grew up hating the Soviets for. You can be detained and arrested for no having your papers – whodda thunk.

      1. Can you reduce this story down to a simple slogan like “Bush lied, people died,” or “What about Halliburton” or “Dick Cheney is evil,” and then have the meme spread every night through pop-culture outlets such as Comedy Central?

        If not, most people won’t understand, or much less care, what this is about.

  3. ‘I like big banks and I cannot lie
    You dumb taxpayers can’t deny . . .’

  4. “he lacks the competence, the honesty and the moral character”

    -which means he’s perfect for this administration. It’s the Chicago way!

    1. Hey now, the Chicago way is sending the other guy to the hospital – giving the other guy thirteen billion fucking dollars is the Washington way. (Yeah, Chicago is pretty fucked up politically, but from the way some people talk corruption and sleaze didn’t exist pre-Obama.)

      1. but from the way some people talk corruption and sleaze didn’t exist pre-Obama.)

        Yeah but they had devil horns while the current group has halos.

        1. Actually it’s tin foil that sits on top of their horns. You just got to look real close. Please remember the devil wants to god, so the tin foil is his fall back plan.

  5. having a government that could tear up contracts at random would probably be is worse.


  6. “pay the counterparties the market value of the CDOs.”

    But wasn’t that zero?

    1. But wasn’t that zero?

      Only according to the Lone Biker of the Apocalypse, whose economic wisdom has been forgotten by all except one other commenter and me.

      1. I take that as a compliment.

        1. You should start a payday lending business: Loan Biker of the Apocalypse. With the motto: “Lowest rates the market will bear.”

    2. “pay the counterparties the market value of the CDOs.”

      But wasn’t that zero? Probably not. Most of these derivative contracts, including credit default swaps, are “specific performance” contracts. That means they can’t necessarily be monetized at “market value”, but have to be actually performed according to their terms.

      I believe a bankruptcy court has the authority to pay out specific performance contracts at less than their face value.

  7. I am in total agreement with the other commenters and Tim. Geithner is a low-down piece of shit hustler, and he needs to pay. But he won’t. None of these fuckers will ever pay.

  8. there is no question that the effect of FRBNY’s decisions — indeed, the very design of the federal assistance to AIG — was that tens of billions of dollars of Government money was funneled inexorably and directly to AIG’s counterparties.

    How many times do I have to say “naked swaps” and “double indemnity”?

    Think about it.

  9. there is no question that the effect of FRBNY’s decisions — indeed, the very design of the federal assistance to AIG — was that tens of billions of dollars of Government money was funneled inexorably and directly to AIG’s counterparties.

    How many times do I have to say “naked swaps” and “double indemnity”?

    Think about it.

  10. there is no question that the effect of FRBNY’s decisions — indeed, the very design of the federal assistance to AIG — was that tens of billions of dollars of Government money was funneled inexorably and directly to AIG’s counterparties.

    How many times do I have to say “naked swaps” and “double indemnity”?

    Think about it.

  11. there is no question that the effect of FRBNY’s decisions — indeed, the very design of the federal assistance to AIG — was that tens of billions of dollars of Government money was funneled inexorably and directly to AIG’s counterparties.

    How many times do I have to say “naked swaps” and “double indemnity”?

    Think about it.

    1. Apparently you have to say it five times.

  12. there is no question that the effect of FRBNY’s decisions — indeed, the very design of the federal assistance to AIG — was that tens of billions of dollars of Government money was funneled inexorably and directly to AIG’s counterparties.

    How many times do I have to say “naked swaps” and “double indemnity”?

    Think about it.

  13. It’s funny how reasonistas sound like communists.

    The old commies used to say that the Soviet Union was not “real communism” and if we only implement “real communism” things will work just fine.

    The reasonistas claim that the failures of the free market is because we don’t have “real free markets” and once we implement “real free markets” with “real deregulation”, we will enter libertopia.

    1. I agree that it’s pretty lame when libertarians claim in some abstract sense that some problem they don’t know much about is only a problem because of a lack of free market freedom of liberated freedom.

      But is it not fair to point out a specific case in which a government intervention (one that was very far out of the ordinary) produced a worse result than the private sector would have produced on its own?

      I mean it’s only in the last few weeks that the regular media have begun to get half-serious about checking up on the results of all these wonderful nationalizations that have been going on for 24 months. Can’t libertards have our say? Jeebus Christmas, it’s not like anybody’s listening anyhow.

    2. Don’t confuse outcomes with breaches of liberty.

      Yeah the financial sector might have been a far more painful place to be had Geithner not stepped in with his mad, genius plan. But guess what kinds of dicey investments wouldn’t be made again by financial institutions when taxpayers weren’t there to bail them out?

      Plus I wouldn’t be throwing household items at my TV everytime Obama made hay about $160 million in bonuses while his administration is wiring $40 billion in taxpayer money… so those firms can honor those bonuses.

    3. The difference is what we have currently is not slightly off from capitalism, but considerably in the opposite direction.

      There are two components to a libertarian economic system: 1) the free-market and 2) capitalism. The first component deals with management and the second component deals with the production structure.

      Capitalism requires the construction of physical savings to produce goods. The savings stock is mediated by various and non-uniform interest rates in a free-market system. Centralized price controls in the form of Fed rates isn’t a slight aberration from the free-market–it is the polar opposite.

      Secondly, the low rates have artificially tilted the production structure away from capital-formation, a. la. capitalism, to consumerism.

      Historically, combining free-market and capitalistic systems in a liberal culture requires precise property boundaries. We have no such thing. The very words “systemic risk” could not happen in a liberal capitalistic culture. In our credit driven, faith-based economy, it can. This is why many Austrian economists believe in full-reserve banking.

      Our current economic system is much more akin to a corporatist consumption economy. While I agree that there are poor defenses on behalf of free-market capitalism, your comparison is simply invalid. There was very little the Soviets could do to become “more communist.” To become more free-market capitalist we could eliminate the 40% of GDP that is government based and all of its respective programs, eliminate the central bank, eliminate fractional reserve banking, go from a 1% savings rate to a 15% rate (or perhaps a 40% rate like China), and transform our economy from 70% of GDP being consumption to 50%.

      These are all radical reversals of the last 100 years of economic and government policy. If we were not just “more capitalistic,” but capitalistic at all, the entire economic system we have now would be burned to the ground.

  14. A comparison between free-market advocates and communists – that’s sure an original conceit, why not tell us more? ?

    1. Happens to the best of us.

  15. eds, but historical evidence shows the less govt intrusion in the market, the better result for all involved.

    There simply is no evidence on the flip side for communism. It was awful in any variant it was tried.

  16. The deal ended up costing taxpayers at least $13 billion.

    Hey, it’s not like Timmy’s exposed on the transaction.

  17. NPR covered this, and they gave the last word to an ‘expert’ who basically said “Yeah well, I mean the report is all well and good but it misses the big picture: When you’re shitting your pants, you don’t have time to analyze these things thoroughly, and so you do the best you can, and Geithner did a good job”.

    I was waiting for Paul Krugman to come in with an editorial about how Obama isn’t going far enough with the bailouts.

    1. I love the total fail of that logic.

      Do you hire a fireman who is going to lose his head when a building is on fire?

  18. Folks, please… Geithner is nothing more than the Goldman Sach’s savior boy. They saw the train wreck coming and bet both ways, knowing they couldn’t lose with the Geo. W thieves, who were the originators of TARP; not to mention the thieves who made a mockery of democracy in the election of 2001! May god (or some omnipotent entity) help us all… good luck-

    1. 2001?
      VA gubenatorial race? Some mayoral or school board election?
      I must of missed it.

  19. “and that government of Goldman Sachs, by Goldman Sachs, for Goldman Sachs, shall not perish from the earth.”

  20. Corruption, Panic and Incompetence Fueled Geithner’s Backstairs Intrigue Everything the Administration Has Done So Far

    Fixed, for great justice

  21. eds wrote: “The reasonistas claim that the failures of the free market is because we don’t have ‘real free markets’ and once we implement ‘real free markets’ with ‘real deregulation’, we will enter libertopia.”

    I haven’t heard anyone claiming that what we have now is “fake free markets”.

    But if you are laboring under the illusion that we what we have now is a free market, that only demonstrates your utter lack of knowledge of what a free market would be.

    Here is what a free market does NOT have:

    1) A fiat money supply

    2) A central bank with unlimited power to inflate or contract that money supply and thereby: a) Force interest rates low enough to convince unqualified borrowers that they can, in fact, make a mortgage payment, then b) Force interest rates up to where those borrowers can no longer make their payments, thereby facilitating a foreclosure crises.

    3) A government-imposed, fractional-reserve banking system operating with government-imposed reserves of only 4%, making it perilously unstable to any loss of consumer confidence — which, in turn, means the Federal Reserve must do whatever is necessary to keep the public convinced that they may safely leave their money in these banks.

    4) A government-run deposit insurance program that encourages depositors to ignore the risks taken by banks with their money — an insurance plan that has recently been greatly expanded in an effort to keep people ignoring the risks being taken with their money.

    5) A government-imposed cartel of investment rating agencies which all investors and sellers of investments are required to use, and which remains in business and still must be used even after they’ve helped facilitate a financial crises by rating investments that contained subprime and worse loans “AAA”.

    6) A vast array of government regulations that forbid discrimination in lending, the enforcement of which can and did lead to only one possible result: a great deal of indiscriminate lending — which lead to an unsustainable housing bubble — the popping of which lead to massive foreclosures and billions in losses.

    7) Huge government-sponsored entities Fannie, Freddy, Ginny, FHA, FHFO, etc. to “insure” a continued flow of funds to unqualified mortgage borrowers — — which funds were largely flushed down the toilet by the foreclosures, and are now being covered by looting the American taxpayers to pay for the foolish judgments of the executives at these firms.

    8) A Securities and Exchange Commission that sets the rules and requirements for all investments that are sold and thereby encourages investors of all sorts to assume that an investment that is SEC-approved is safe — an agency that turned a blind eye to repeated reports of the billions being bilked out of investors by Madoff, but which has subsequently suffered absolutely no punishment for its neglect.

    9) A federal government with a long track record of bailing out big firms that get into trouble and which at present is looting the American taxpayers to keep Goldman Sachs, AIG, General Motors, the UAW and a whole host of other blood-sucking cronies in business wasting ever-more of the taxpayer’s money.

    These are a few of the main features of our highly regulated, “mixed” economy, that combines a few elements of capitalism with a vast array of controls, rules, regulations and on-going government interventions that create and sustain massive economic problems and dislocations.

    The claim that this crises was caused by “deregulation” or by “laissez-faire capitalism” is utterly preposterous. Capitalism has been destroyed and replaced with the regulatory/welfare state — and changing one regulation while leaving thousands on the books to be enforced by legions of government bureaucrats and regulators does not qualify as “deregulation”.

  22. I disagree with your claim that a bankruptcy would have been limited to the participants. I have never seen any claim that the insurance and annuity business of AIG would have been protected in a bankruptcy. If not, there would have been a lot of little people hurt.

    Second, companies like Goldman had collateral in hand for the CDS and so had little to fear from a bankruptcy. I suggest you review this:



    1. Then the appropriate answer is to provide direct assistance to the “little people” or assume control of the insurance and annuities business and parcel it out like the FDIC does during a bank failure.

      The first mistake was bailing out AIG at all. I guarantee that Goldman et al would not have held their ground on their CDS values if they thought the government would let AIG fold up. They called the Fed’s bluff and it worked.

  23. Interesting post, Tim. I look forward to reading the report.

    I can see panic & some imcompetence in what you report, but corruption? That’s a strong claim, one that isn’t supported by what I’ve read in your post. Perhaps it’s in the report?

  24. From the CNBC-hosted town hall event, “Warren Buffett and Bill Gates: Keeping America Great”, at Columbia Business School:

    BECKY: Warren, was it a mistake for the government to allow Lehman to go under?

    BUFFETT: It may have been. But I would say overall, the officials in Washington did a terrific job of dealing with really what was an economic Pearl Harbor, as we talked about. So I would say that if Merrill hadn’t been bought by the B of A, Merrill would have gone very quickly. And the dominoes were really lined up. And I don’t think it was fully appreciated, perhaps, what a big domino Lehman was or how close it was to the next big dominoes. But overall, I give (former Treasury Secretary Henry) Paulson, I give (Federal Reserve Chairman Ben)Bernanke, I give (FDIC Chairman) Sheila Bair, I give (Treasury Secretary) Tim Geithner, I give them very high marks for the fact they took unprecedented action. [APPLAUSE]

    “It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better.” While we’re still coughing up water after being saved from drowning, are we blaming the lifeguards for getting us wet?

    1. Warren Buffet always, always, talks his book. What he is saying here is that a considerable amount of bailout money found its way into his pocket, and that’s A-OK by him.

      1. As always, by their twisted metaphors will ye know they are lying: Was it an economic Pearl Harbor or was it dominoes falling? And wait, now there are big and little dominoes? I’ve never seen that before. And then gs (Goldman Sachs?) chimes in with the lifeguard? Even Michael Bay couldn’t work lifeguards and irradiated dominoes into his Pearl Harbor story.

        1. Whether or not Buffett will be proved correct, his record as history’s most successful long-term investor gives him a claim on my respectful attention. Although dubious, I hope he’s right.

          Speaking of twisted metaphors, denial is not a river in Egypt.

  25. I could have sworn that Goldman was claiming, and the MSM media agreeing, that they didn’t benefit from the AIG bailout at all. And that their recent huge profits had nothing to do with any taxpayer money being funnelled to them. Does anyone else remember that?

  26. Oh my, the modern robber-barons selling their book to the fleeced sheep/taxpayer by CNBC/GE captive media….”Warren Buffett and Bill Gates: Keeping America Great”…these fools will not stop till the whole thing is burning, will they!

  27. Corruption, Panic & Incompetence: weren’t they the opening band for Yes during their 1975 tour?

  28. I return to grovel for forgiveness for the quintuple posting last night. Let me always remember never to click the submit button repeatedly, just because the transmission is slow.

  29. Most people who comment at Reason have a big problem with prosecutors. Many of the criticisms are valid.

    Personally, I think that despite the flaws in the system, prosecutors are some of the few people in a position of power to do anything about removing corrupt government officials from office – especially the ones who are not publicly elected.

    It’d have to be a prosecutor in New York, maybe New Jersey, to bring TG down, so my hopes aren’t very high.

    One of the other comments brought up the difference between incompetence and corruption: When certain people benefit from your incompetence, it’s called motive.

  30. IANAE, but I found these posts to be quite persuasive, and they give a somewhat different reading of the report. More recent and less recent but still relevant:

    (This is also why the Fed paid Goldman and the other counterparties 100 cents on the dollar to terminate their CDS contracts with AIG, which this Bloomberg article portrays as some sort of gift to the banks. But the Bloomberg article also relies on the Immaculate Negotiation argument ? how, exactly, was the Fed supposed to get the counterparties to agree to take a haircut? The Fed had just demonstrated to the entire world that it wasn’t willing to let AIG file for Chapter 11. How do you suppose those negotiations would have gone? The Fed couldn’t say, “You can either take a haircut to 70 cents or AIG will file for bankruptcy and you’ll only get 50 cents,” because everyone knew the Fed wasn’t willing to put AIG in bankruptcy.)

    There is also stuff here in defence of the “absurd statement” TC quoted above.

    As I said, it’s not my field, so I’d be interested to see some challenge to EoC’s “Immaculate Negotiation” argument. Although not as interested as I’d be to see up and running again.

  31. In a sense, health care reform has been jeopardized by Geithner. Recall that Geithner had some tax problems that almost derailed his Senate confirmation but the Administration still pushed for his confirmation. However, when Daschle’s appointment as HHS Secretary also encountered some tax problems, the Administration was reluctant to push through a nominee with problems twice so Daschle withdrew his nomination. Daschle is an acknowledged expert on health care and might have been able to formulate a more effective health care reform.

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