Report hits Geithner over AIG bailout
The government’s watchdog over the bank bailout program is criticizing Treasury Secretary Timothy Geithner’s handling of one of the most sensitive moments of last year’s financial meltdown, questioning decisions he made while heading up the New York Federal Reserve Bank.
The new report criticizes the New York Fed’s decision in the fall of 2008 to bail out insurance giant AIG by covering its clients’ losses, sending tens of billions in taxpayer dollars to overseas banks.
“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 or the impact that those terms might have on the future of AIG,” reads the report, which is signed by special inspector general Neil Barofsky.
The decision to cut the counterparty deal has come under fire because it effectively passed money along to financial companies that had signed intricate contracts with AIG, and sent tens of billions in U.S. taxpayer funds to major Wall Street players such as Goldman Sachs as well as foreign banks including Société Générale and Deutsche Bank.
“Questions have been raised as to whether the Federal Reserve intentionally structured the AIG counterparty payments to benefit AIG’s counterparties — in other words that the AIG assistance was in effect a “backdoor bailout” of AIG’s counterparties,” said the report. “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 report explains that the New York Fed attempted to negotiate a “haircut” with those institutions in which they would take less than 100 cents on the dollar for their obligations, but the banks refused. That meant, Barofsky concluded, that “the counterparties were effectively paid full face (or par) value of the credit default swaps, an amount far above their market value at the time.”
A senior Treasury official told POLITICO Monday that the report amounts to nothing more than “20-20 hindsight” and “second guessing,” of decisions made in the most dire hours of the financial crisis. “This is a classic case of a guy telling you that you could have gotten a better deal after the fact,” the official said. “But it’s a little hard to refinance when your house is on fire.”
Rep. Darrell Issa (R-Calif.), the top Republican on the House Committee on Oversight and Government Reform, reacted angrily to the information in the report. “Behind closed doors and with no approval from Congress, the FRBNY added an additional $13 billion of debt on the backs of taxpayers to give a backdoor bailout to AIG’s creditors, including Goldman Sachs, Merrill Lynch, Société Générale and Deutsche Bank,” said Issa, who concluded taxpayers ultimately lost that amount on the deal. “The lack of transparency and accountability in this transaction is disturbing enough. However, there is evidence that this $13 billion expenditure was entirely unnecessary. All of this begs the question why the FRBNY would not drive a better bargain for the American taxpayer.”
The non-profit Project on Government Oversight Director Danielle Brian also reacted critically. “Despite Secretary Geithner's repeated denials, the SIGTARP's latest audit shows how the AIG bailout was actually designed to funnel tens of billions in government funds to counterparties such as Goldman Sachs.”