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.
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.