Methinks It May Be Time for Mr. Geithner to Go

By: Reggie Middleton | Thu, Jan 7, 2010
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It's going to be pretty hard extracting your metatarsus from your anus this time around. I mean, everyone makes mistakes with taxes, but the multi-billion dollar back door bailout that you tried to hide via EMAIL???!!! Come on, guys. If you're not smarter than that then you definitely won't be able to solve this financial situation thingy... Unless he knew absolutely nothing about the biggest bailout in the history of his country - under his watch, that is...

Geithner's New York Fed Told AIG to Withhold Details of Payments to Banks

Jan. 7 (Bloomberg) -- The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer's payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show. And I must ask, Why???!!! If it was to be secret, why use email. If it wasn't to be a secret, why'd you do it anyway! Did you assume that there would be de minimus blowback in the form of repercussions?

AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008. The e-mails were obtained by Representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee. Hey, at least somebody is doing their damn job!

The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps, which were contracts tied to subprime home loans, threatened to swamp the insurer weeks after its taxpayer-funded rescue. The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the swaps, prompting lawmakers to call the AIG rescue a "backdoor bailout" of financial firms.

It was actually more of a front door bailout. Pay attention all - Goldman would be no more if the government didn't back that payment! This is the counterparty risk that I was crowing about when I told everybody that Bear Stearns was going to go bust three months before they went bust - Is this the Breaking of the Bear?. There is still a multitude of daisy chain counterparty risk out there. JP Morgan, et. al. anyone??? An Independent Look into JP Morgan.

Cute graphic above, eh? There is plenty of this in the public preview. When considering the staggering level of derivatives employed by JPM, it is frightening to even consider the fact that the quality of JPM's derivative exposure is even worse than Bear Stearns and Lehman's derivative portfolio just prior to their fall. Total net derivative exposure rated below BBB and below for JP Morgan currently stands at 35.4% while the same stood at 17.0% for Bear Stearns (February 2008) and 9.2% for Lehman (May 2008). We all know what happened to Bear Stearns and Lehman Brothers, don't we??? Subscribers, see The JP Morgan Full Forensic Report is ready for download.

We are actually more at risk now than we were when Lehman failed! We have more counterparty risk concentration through lesser and lesser counterparties - As the markets climb on top of one big, incestuous pool of concentrated risk...

Risk is being taken off balance sheet that is staggering, yet remains largely unreported in the mainstream media - "Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?"

  1. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?
  2. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 - JP Morgan
  3. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 3 - BAC (the bank
  4. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? Pt 4 - Wells Fargo
  5. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? Pt 5 - PNC Bank
  6. The Next Step in the Bank Implosion Cycle???

Everybody knows the banks are too big to safely 1control (worldwide, not just in the US), but are they broken up? Nope! Any objective review shows that the big banks are simply too big for the safety of this country.

And why not? Regulatory capture, my friend - How Regulatory Capture Turns Doo Doo Deadly - or more simply put, straight up bribery!

As a matter of fact, the only thing that has significantly changed is the fact that the Fed has instituted implicit and explicit put options under the wayward risk taking market participants who started all of this and acts as not only the liquidity provider of last resort, but the liquidity provider of only resort in many if not most markets.

Ok, "Rant Engine" offline and back to the article:

"It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information," said Issa, a California Republican. Taxpayers "deserve full and complete disclosure under our nation's securities laws, not the withholding of politically inconvenient information." President Barack Obama selected Geithner as Treasury secretary, a post he took last year.

Bank Payments

Issa requested the e-mails from AIG Chief Executive Officer Robert Benmosche in October after Bloomberg News reported that the New York Fed ordered the crippled insurer not to negotiate for discounts in settling the swaps. The decision to pay the banks in full may have cost AIG, and thus taxpayers, at least $13 billion, based on the discount the insurer was seeking.

... In order to make only the disclosure that the Fed wants us to make," Shannon wrote, "we need to have a reasonable basis for believing and arguing to the SEC that the information we are seeking to protect is not already publicly available."

AIG disclosed the names of the counterparties, which included Deutsche Bank AG and Merrill Lynch & Co., on March 15. The disclosure said AIG made more than $27 billion in payments without identifying the securities tied to the swaps or listing the value of individual purchases by each bank, details the Fed wanted to keep out, according to the March 12 e-mail from AIG's Shannon.

...According to Shannon's e-mails obtained by Issa, the New York Fed suggested that AIG refrain in a filing from mentioning so-called synthetic collateralized debt obligations, which bundled derivative contracts rather than actual loans.

The filing "reflects your client's desire that there be no mention of the synthetics in connection with this transaction," Shannon wrote to Davis Polk on Dec. 2, 2008. "They will not be mentioned at all."

... As part of a bailout that swelled to $182.3 billion, AIG and the Fed created Maiden Lane III, a taxpayer-funded facility designed to remove mortgage-linked swaps from the insurer's books. Shannon told the New York Fed on Nov. 24, 2008, that AIG executives wanted to publicly disclose details about Maiden Lane the next day.

... Do you think it might be feasible to hold off on the Maiden Lane III 8K and press release until next week?" Brett Phillips, a New York Fed lawyer wrote in an e-mail that day. "The thinking is that the Maiden Lane III closing will be a less transparent event, and it might be better to narrow the gap between AIG's announcement and the New York Fed's publication of term sheet summaries."

"Given the significance of the transaction, AIG would be best served by filing tomorrow," Shannon wrote. "We will of course be guided by your counsel." The document outlining the Maiden Lane agreement was posted on Dec. 2, 2008.

...We believe that the agreements listed in the index (i.e., the Master Investment and Credit Agreement and the Shortfall Agreement) do not need to be filed," Peter Bazos, a Davis Polk lawyer wrote on Nov. 25, 2008. "Please let us know your thoughts in this regard."

AIG's Shannon replied that "the better practice and better disclosure in this complex area is to file the agreements currently rather than to delay." The agreements were included in the Dec. 2 filing.

"Federal Reserve officials provided AIG's counterparties with tens of billions of dollars they likely would have not otherwise received," Barofsky wrote in a Nov. 17 report. "The default position, whenever government funds are deployed in a crisis to support markets or institutions, should be that the public is entitled to know what is being done with government funds."

AIG's first rescue was an $85 billion credit line from the New York Fed in September 2008. The bailout was expanded three times and is valued at $182.3 billion...



Reggie Middleton

Author: Reggie Middleton

Reggie Middleton

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