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Tuesday, January 26, 2010 11:22 AM

Questions Geithner Cannot Escape

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Not only is Bernanke coming under attack, questions keep popping up about treasury secretary Tim Geithner. Please consider The Question Geithner Can’t Escape: Why Pay Off AIG’s Partners?

The latest political clamor over AIG, poised to combust next Wednesday at a House hearing on backdoor payments to banks that made risky deals with the company, centers on the Federal Reserve’s effort to conceal details of those payments. But senior officials, including Treasury Secretary Timothy Geithner, have so far evaded a key question: Why were AIG’s trading partners fully paid with taxpayer money instead of being told to take a loss?

“They chose to pay some people off entirely,” Bill Black, an economics and law professor at the University of Missouri and a leading critic of the government’s bailout managers, said in an interview. “They have never given a coherent explanation of why those particular folks. Under their own logic, there was no reason to pay off these parties at 100 cents on the dollar.”

In November, bailout inspector general Neil Barofsky quoted Geithner as stating that AIG’s bank counterparties — including Goldman Sachs, Merrill Lynch and 10 foreign firms — were not at direct risk if the troubled company defaulted on its debts. “The direct effects of that failure would not have been particularly significant,” Geithner reaffirmed last month during testimony on Capitol Hill.

In May, however, Geithner suggested that AIG could not have negotiated lower payments to its trading partners without endangering the health of the whole financial system.

“We have no option now to selectively diminish the value of those claims without taking risks that you would have a default,” he told Sen. Chris Dodd (D-Conn.). Rep. Jo Ann Emerson (R-Mo.) was told that “you can’t selectively allow the institutions to default on particular types of creditors without risk that the whole thing comes unwound.”

So which explanation is true: Were AIG’s creditors hedged against the risk of a default — as Goldman has argued — or not? And if the banks had already mitigated the risk of losing their deals with AIG, why didn’t that allow Geithner’s Fed to negotiate a cut in repayments?
Too Good To Be True?

In the hopefully NOT too good to be true category, Henry Blodget at the Business Insider is asking Is It Just Us, Or Did Tim Geithner Get Fired Yesterday?
Earlier this month, we argued that it was time for Treasury Secretary Tim Geithner to go.

Our logic was simple:
  • Geithner's save-Wall Street-at-any-cost policy has failed (the banks aren't lending), and it is distorting fairness and competition throughout the economy
  • Geithner's role in the AIG bailout and cover-up continues to undermine confidence in the current administration (and makes it impossible for the current administration to blame AIG on the last administration)
We still think Geithner should go. And judging by yesterday's startling Get-Tough-On-Banks press conference, it seems Obama is coming to the same conclusion.

Recall the opening words of Obama's short speech:

Good morning, everybody. I just had a very productive meeting with two members of my Economic Recovery Advisory Board: Paul Volcker, who is the former chair of the Federal Reserve Board, and Bill Donaldson, previously the head of the SEC. And I deeply appreciate the counsel of these two leaders and the board, that they’ve offered as we have dealt with a broad array of very difficult economic challenges.

What Obama was telling America was "I just had a meeting with two new advisors, and, based on what they said, I'm launching a new policy."

At the very least, yesterday's press conference seemed designed to tell America that Tim Geithner has been marginalized, that Obama is now (finally) committed to change. More likely, it was a prelude to Geithner formally being shown the door.
Well, I suppose we can hope.

Is AIG a National Security Matter?

As amazing as it might seem SEC mulled national security status for AIG details.
The request to keep the details secret were made by the New York Federal Reserve -- a regulator that helped orchestrate the bailout -- and by the giant insurer itself, according to the emails.

The emails from early last year reveal that officials at the New York Fed were only comfortable with AIG submitting a critical bailout-related document to the U.S. Securities and Exchange Commission after getting assurances from the regulatory agency that "special security procedures" would be used to handle the document.

The SEC, according to an email sent by a New York Fed lawyer on January 13, 2009, agreed to limit the number of SEC employees who would review the document to just two and keep the document locked in a safe while the SEC considered AIG's confidentiality request.

The SEC had also agreed that if it determined the document should not be made public, it would be stored "in a special area where national security related files are kept," the lawyer wrote.

More than a year later, the Fed's bailout of AIG remains controversial because it funneled nearly $70 billion to 16 big U.S. and European banks that had bought credit default swaps from AIG. Banks like Goldman Sachs Group Inc, Societe Generale and Deutsche Bank had bought those insurance-like derivatives to guard against defaults on hundreds of securities backed by subprime mortgages.
Time To Indict Geithner

It's time for all the facts to come out on AIG, all of them, in a court of law.
Indeed it's Time To Indict Geithner For Securities Fraud
The web of known parties guilty of fraud, coercion, or securities manipulation keeps getting bigger. Please consider N.Y. Fed Told A.I.G. Not to Disclose Swap Details.

I am 100% in favor of allowing Geithner to defend himself ... In a court of law, for securities fraud.

And as I have stated before Paulson, Bernanke, and Bank of America ex-CEO Lewis as well.

April 24, 2009: Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis

July 17, 2009: Paulson Admits Coercion; Where are the Indictments?

October 20, 2009: Bernanke Guilty of Coercion and Market Manipulation
While you are wondering where the indictments are perhaps you may wish to review Where The Hell Is The Outrage?

Mike "Mish" Shedlock
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