Guided By Your Counsel

January 9, 2010 5:12 PM

Jan 7: 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.
posted by moorooka (34 comments total)

Barney Frank, a Massachusetts Democrat and chairman of the House Financial Services Committee, said the e-mail exchanges were “troubling” and that he supports holding congressional hearings to review them.

When does Congress start holding hearings on its own behavior?

Sweetheart deals seem par for the course in DC.
posted by SeizeTheDay at 5:43 PM on January 9, 2010

I think I can understand this, to some extent. The thing they were trying to avoid was a huge run on the banks. That would have been a complete disaster, leading to the melt down of the whole western economic system.

That was why the early TARP funding went to all big banks, whether they needed help or not. That sounds stupid, doesn't it? But if only some banks had received help, there would not have been any way to prevent the public from finding out which banks it was, and it would have painted a big sign on them saying "These banks are unstable; flee for your life!"

So yeah, it all sounds very unsavory -- but what would have happened if they'd done it some other way? Would it have been worse? I think that's what they were thinking. It wasn't about sweetheart deals, it was about preventing the system from collapsing entirely.
posted by Chocolate Pickle at 6:02 PM on January 9, 2010 [1 favorite]

So yeah, it all sounds very unsavory -- but what would have happened if they'd done it some other way? Would it have been worse? I think that's what they were thinking. It wasn't about sweetheart deals, it was about preventing the system from collapsing entirely.

Bullshit. We're 14 months removed now from the situation, and yet we've seen NO action to break up the large banks. Per Simon Johnson, "The country’s been taken prisoner by a Wall Street that rejects reform."

I would say Geithner should be fired, but the problem is far deeper than him Obama surrounded himself with people who helped create this mess: Rubin and Summers. The same guys who supported the repeal of Glass-Steagal, who were opposed to derivatives legislation, and who can't fathom the fact that their worldview of finance is DEAD WRONG. At least Greenspan publicly admitted his failure. These clowns still wield a huge amount of power, and Obama, unfortunately, can't do the math (literally and figuratively).
posted by SeizeTheDay at 6:18 PM on January 9, 2010 [25 favorites]

So what? The public has no statutory right to know. They just have the obligation to pay to bail out their betters. For the greater good of the whole plantation.

"No one believes more firmly than Comrade Napoleon that all animals are equal. He would be only too happy to let you make your decisions for yourselves. But sometimes you might make the wrong decisions, comrades, and then where should we be?"
posted by orthogonality at 7:05 PM on January 9, 2010 [10 favorites]

Obama surrounded himself with people who helped create this mess: Rubin and Summers. The same guys who supported the repeal of Glass-Steagal, who were opposed to derivatives legislation, and who can't fathom the fact that their worldview of finance is DEAD WRONG. At least Greenspan publicly admitted his failure. These clowns still wield a huge amount of power

This has been confusing and really outraging for me as Sanders is just a bad comb over from being Montgomery Burns, he's that fucking evil in his economic policy (not to mention other areas).

I really wish Obama would get his head out of his ass on the economic issues.
posted by kaiseki at 7:05 PM on January 9, 2010

I really wish Obama would get his head out of his ass.
posted by ryanrs at 7:13 PM on January 9, 2010 [8 favorites]

From the article:
“Secretary Geithner played no role in these decisions,” Meg Reilly, a Treasury spokeswoman, said in an e-mail. “He was recused from working on issues involving specific companies, including AIG,” after his nomination for Treasury secretary on Nov. 24, 2008. Geithner “began to insulate himself weeks earlier in anticipation of his nomination,” she said in a separate statement.

This is stranger and more troubling than the apparent efforts not to disclose the payments. It raises so many questions. Why would the Treasury Secretary have to recuse from working on issues involving specific companies? Both the Treasury Secretary and the Governor of the New York Fed are regulators, and their roles should be complementary (not like regulator/regulated, where recusal would be in order). Also, why only specific companies, and what companies?

Does it make sense that the Governor of the New York Fed decided to "insulate himself" from at least some aspects of his job for "weeks" during the middle of the financial meltdown?
posted by Slap Factory at 7:14 PM on January 9, 2010 [1 favorite]

I agree, SeizeTheDay, this whole situation represents a huge lost opportunity.

The big lesson of the crash was that the whole financial system was structurally flawed. It massively mispriced risk, and over-rewarded certain investments (e.g., real estate and all the creative financial instruments designed to extract money out of it) far beyond their actual value. The whole thing was a giant machine for wealth destruction that pumped money and the labor of lots of intelligent and well-educated people into a pit where it created nothing useful for anyone, but seemed on paper to be generating huge returns.

And yet nothing at all gives me the impression that Geithner or Summers want to do anything but return to the status quo ante ruina. Yeah, lots more people had jobs back then, but the whole thing fell apart because it was built on a rotten foundation.

A bubble bursting like this is a chance to step back, assess the flaws that led to the outcome, and address them, so that when the system does unfreeze it doesn't just go back to doing what it did before. But all the regulators seem to want to do is pump enough liquidity in to keep things limping along.
posted by strangely stunted trees at 7:22 PM on January 9, 2010 [4 favorites]

I laughed out loud when I saw that Obama had told 60 Minutes "I didn't become President to bail out rich fatcats." History is going to judge him primarily on the awful, awful choices he made for leaders during this economic crisis. He had a perfect opportunity to really effect change and he went 180 degrees in the other direction.

Seriously. History books will talk about Obama's pathetic choices re: the financial disaster of 2008-2009.
posted by mediareport at 7:37 PM on January 9, 2010 [8 favorites]

Let 'em eat cake.

Still their attitude toward the common people.
posted by HTuttle at 7:45 PM on January 9, 2010 [2 favorites]

can someone explain the significance of the information that was left out? the article, from what I can understand of it, is basically saying "leaving out info that could be vital is wrong," which hey i get. but I don't get the nature of the info that was left out and why it was left out and who that benefitted.
posted by shmegegge at 8:08 PM on January 9, 2010

We're 14 months removed now from the situation, and yet we've seen NO action to break up the large banks.

Is this directly related to Chocolate Pickle's explanation? I don't see how. And the explanation itself seems pretty credible to me.

Though I'm also worried about the apparent close involvement of people who helped create the current situation in shaping continuing policy.
posted by weston at 8:12 PM on January 9, 2010

Is this directly related to Chocolate Pickle's explanation? I don't see how.

There's a pattern to Geithner, Paulson, and Bernanke's behavior (not to mention various Congresspeople). You want to avoid a system-wide bank run. Absolutely. But Chocolate Pickle argues that it wasn't about sweetheart deals - that it was strictly about saving the system. THAT is wrong. It wouldn't have been a sweetheart deal if there was a semblance, any at all, of some sort of financial regulatory reform. Think about it - in a healthy system, there is no AIG holding the entire global economy hostage with contracts that it can't honor. In a healthy system, major banks across the globe wouldn't need to be made whole (paid out by the govt) to stay solvent. In a healthy system, equity infusions to banks across the country would be absurd. Instead, we'd have structured bankruptcies, or system-wide writedowns and recapitalizations (eliminating current management and giving bondholders haircuts).

What does that tell you? The system is broken. It was broken before the crisis, and 14 months later, the major benefactors of various bailouts still exist, are larger in some cases, and no meaningful reform has even come close to passing. Do you really think this is an accident? That somehow Congress, the President, AND the Fed didn't have time, or the political capital, to take the necessary steps? Or, as Simon Johnson notes, are the regulators and politicians captured (or worse, in on it)?

NO ONE even attempted to negotiate with AIG's counterparts. People were so worried that the entire system would implode that ultimately the United States government, arguably the SINGLE MOST POWERFUL INSTITUTION IN THE WORLD, rolled over, held hostage by banks that it's supposed to regulate. And now, 14 months later, we're no better off, and in some cases, much worse off, since the top 6 banks have grown more powerful.
posted by SeizeTheDay at 8:28 PM on January 9, 2010 [8 favorites]

If you can't regulate something, you're not more powerful than it.
posted by smackfu at 8:43 PM on January 9, 2010 [4 favorites]

This has been confusing and really outraging for me as Sanders is just a bad comb over from being Montgomery Burns, he's that fucking evil in his economic policy (not to mention other areas).

Are you talking about Bernie Sanders, the socialist senator from Vermont? He does kind of look like Burns but I would hardly call him evil.

I agree, SeizeTheDay, this whole situation represents a huge lost opportunity.

Not for the people who actually got to decide. They seized the hell out of it.

The person who's most often mentioned as the successor to Geithner? Jamie Dimon -- Current CEO of JPMorgan Chase. Who was recently arguing that we don't need to break up the banks, we just need to regulate them more carefully. The whole thing is absurd.
posted by delmoi at 8:52 PM on January 9, 2010

History books will talk about Obama's pathetic choices re: the financial disaster of 2008-2009.

No, they won't, unless you're talking about books written by Chomsky and Zinn.
posted by empath at 9:49 PM on January 9, 2010 [1 favorite]

Not for the people who actually got to decide. They seized the hell out of it.

Touché. But how much longer can the party go on, even for them? At some point all the money's going to run out, or there's going to be a revolution.

For Top Bonuses on Wall Street, Question Is 7 Figures or 8?

Bank executives are grappling with a question that exasperates, even infuriates, many recession-weary Americans: Just how big should their paydays be? Despite calls for restraint from Washington and a chafed public, resurgent banks are preparing to pay out bonuses that rival those of the boom years. The haul, in cash and stock, will run into many billions of dollars.

Industry executives acknowledge that the numbers being tossed around — six-, seven- and even eight-figure sums for some chief executives and top producers — will probably stun the many Americans still hurting from the financial collapse and ensuing Great Recession.

posted by strangely stunted trees at 9:53 PM on January 9, 2010

I can understand why people aren't outraged about all the bank stuff -- "break up too big to fail" is about two concepts too complicated for casual conversation.

However, "companies who get tax payer dollars are giving their leads ten million dollars" is something everyone can get angry about.
posted by ®@ at 10:10 PM on January 9, 2010

NO ONE even attempted to negotiate with AIG's counterparts.

Well, the question you have to ask is this: negotiate based on what? AIG wasn't in bankruptcy, and everyone knew it wasn't going to go into bankruptcy, so it's unclear what authority AIG had to pay less than the full amount it owed.

AIG actually asked to pay less, its creditors said "no", and that was that. The government could have directed AIG management to underpay, but that would have just resulted in AIG getting sued and losing.
posted by planet at 10:24 PM on January 9, 2010

It's odd that Republicans are so gung-ho about Obama being the leader of a gang of corrupt economists and business types, when those same Republicans installed most of his economic team. Geithner was running the Federal Reserve during Bush's first and second terms.

What Republicans fail to understand with their latest attempt to start a witch hunt:

1. Republicans installed these people during the Bush administration, and everyone knows it

2. Everyone knows Wall Street bankers are corrupt thieves raiding the Treasury, regardless of which talking head is put in charge

3. Most of the lost wealth and jobs happened during the Bush administration, before Obama's election, and most unemployed people haven't forgotten that even if their once-strong feelings for Obama have diminished

4. Middle-class people's retirement accounts are generally back to where they were a year ago

This might be an election issue scandal in a year or two, if things don't improve. But for now I suspect this is a non-issue for most Americans trying to make ends meet and for everyone else who is more comfortable. Pretty much everyone will see this is just another of many salvos in a right-wing campaign to discredit Obama.
posted by Blazecock Pileon at 10:52 PM on January 9, 2010 [2 favorites]

At least Greenspan publicly admitted his failure.

After it was too late to matter. He presided over the Internet Bubble, ignored everyone who said it was a bubble, and all the advice on how to moderate it, and still doesn't seem to realize what tools are available to the Fed.

I'm not quite willing to pitch Summers et al out the window yet. They did somebangup work preventing the Latin American crisis from escalating into a worldwide crash, and even if things seem to be proceeding at a leisurely pace right now, I think there's a consensus in DC that there needs to be better regulation of financial markets.
posted by Jimmy Havok at 10:54 PM on January 9, 2010

I think there's a consensus in DC that there needs to be better regulation of financial markets.

I think you'll find that the consensus in DC is that whoever is put in charge of regulating the financial markets must have worked in them for a long time so that they understand how they operate, and I think you'll find that this consensus is sufficient to cripple any meaningful regulatory reform.
posted by flabdablet at 2:32 AM on January 10, 2010 [4 favorites]

Can someone answer Schmeggege's question? I'd appreciate the clarification too.


can someone explain the significance of the information that was left out? the article, from what I can understand of it, is basically saying "leaving out info that could be vital is wrong," which hey i get. but I don't get the nature of the info that was left out and why it was left out and who that benefitted.
posted by foxy_hedgehog at 6:06 AM on January 10, 2010

"Fire Geithner Now!" ~ By L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute

The above is a more informed, if more shrill, version of my take on Geithner.

“Tim Out – Sheila and Debt Relief In?”

Interesting that this is becoming a greater likelihood. I said last January that I would've preferred Bair in the first place.
posted by SeizeTheDay at 8:01 AM on January 10, 2010 [1 favorite]

"break up too big to fail" is about two concepts too complicated for casual conversation

I disagree; I think a lot of people are turned off by the idea of government intervention in the financial system based on lizard-brain manipulation tactics from the right... but most Americans would actually favor it as part of the meritocratic ideal, as long as it's presented in the right way. Now, watch this drive:

TOO BIG TO FAIL
posted by synaesthetichaze at 8:11 AM on January 10, 2010

can someone explain the significance of the information that was left out? the article, from what I can understand of it, is basically saying "leaving out info that could be vital is wrong," which hey i get. but I don't get the nature of the info that was left out and why it was left out and who that benefitted.

Okay, so AIG wrote all of these credit-default swaps. If you were Goldman Sachs or Deutsche Bank or whoever, and you had lent money out to somebody who might not pay it back, AIG would sell you a CDS; sort of like an insurance policy on the possibility of a default. If your original counterparty couldn't pay back the loan, then AIG would pay out instead.

The problem was that when AIG was figuring out how much money it needed to keep ready to pay out on these, it never considered the possibility of such a huge crash that would throw so many loans into default at once. AIG was in a position where it would be forced to default itself, and the government stepped in and took it over; it would provide the money to pay out these obligations, but AIG would become majority-owned by taxpayers.

After the takeover happened, the New York Fed determined that AIG should pay out on its obligations in full, rather than negotiating with its counterparties to try to agree to less. The banks that AIG had sold all the swaps to were the main beneficiaries of this - they held all these instruments that would have become worthless, but because of the bailout they were paid in full. Geithner and Summers would hold that there was also a major macroeconomic benefit to the transaction going down this way - if AIG hadn't paid out, it could have triggered another wave of defaults by its counterparties on obligations they owed to other parties. Arguably AIG's shareholders (mostly the taxpayers at large by this point) lost out, if AIG could have negotiated paying out at a discount to the originally agreed 100%.

The information withheld was that AIG had paid certain types of these credit-default swaps in their entirety. Its counterparties benefited because this obscured just how many bad credit transactions they had in the first place that had forced them to resort to calling in their CDSs, and were shielded from any pressure that the swaps be paid out at a discount. The regulators benefited from not having these transactions subject to public scrutiny at a high point of public rage over the bailout, and probably also didn't want to disclose until as late as possible just how many of these mortgage-backed loans had gone bad, and who was left holding the bag for them.
posted by strangely stunted trees at 9:59 AM on January 10, 2010 [2 favorites]

The banks that AIG had sold all the swaps to were the main beneficiaries of this - they held all these instruments that would have become worthless, but because of the bailout they were paid in full.

This isn't clear. The CDSs with AIG were heavily collateralized with high quality collateral (e.g., Treasuries) and at least some of AIG's counterparty's had hedged their remaining exposure. Goldman Sachs, for example, claims (seemingly accurately) that they had no uncollateralized, unhedged exposure to AIG at the relevant time, so it's not quite right to say "because of the bailout they were paid in full".

Anyway, it's hard to see how AIG could have negotiated paying less -- it had nothing to offer in a negotiation.
posted by planet at 10:09 AM on January 10, 2010

Seems to me there were some countries with well-regulated banking systems from which a country that cared to engage in best practices could learn a few things. But then it also seems to me that exceedingly few countries seem to take that kind of opportunity.

It's a shame our governments don't learn from one another. I wonder why that is.
posted by five fresh fish at 10:18 AM on January 10, 2010

Anyway, it's hard to see how AIG could have negotiated paying less -- it had nothing to offer in a negotiation.

As I understand it, AIG's creditors were facing being paid nothing at all. Something > nothing is a fairly large negotiating tool.
posted by five fresh fish at 10:21 AM on January 10, 2010

As I understand it, AIG's creditors were facing being paid nothing at all. Something > nothing is a fairly large negotiating tool.

Nope. This occurred after it became clear that AIG wouldn't be put into bankruptcy, so it's hard to see how the creditors would've ended up being paid nothing at all.
posted by planet at 10:25 AM on January 10, 2010

Goldman Sachs is sort of a special case - they saw this crash coming a lot sooner than anybody else did and managed to limit their exposure. I don't think that was true of most of AIG's other counterparties. If nobody had any uncollateralized unhedged exposure, why would the bailout have even needed to happen in the first place?
posted by strangely stunted trees at 10:27 AM on January 10, 2010

If nobody had any uncollateralized unhedged exposure, why would the bailout have even needed to happen in the first place?

These hedges don't pay out until the initial obligor actually defaults, so AIG still would've tanked, and it's conventional insurance business would've gone under. Also, AIG's CDS dealings were far, far larger than the handful of counteparties that have been the focus of the controversy. The most sophisticated of its counterparties (and thus the most controversial to have received payouts) were best positioned to weather a default.

It was without doubt a bad situation. The basic problem, as I understand it, is that the flexible conservatorship/receivership rules to which real banks are subject, and which would've allowed an orderly unwind of AIG, just didn't apply to AIG.
posted by planet at 10:40 AM on January 10, 2010

If you were Goldman Sachs or Deutsche Bank or whoever, and you had lent money out to somebody who might not pay it back, AIG would sell you a CDS; sort of like an insurance policy on the possibility of a default.

The big problem is that you didn't have to have any skin in the game to buy a CDS. All you had to do was pony up, and if the deal you were securitizing went bad, you got cash.

AIG was looking at it like free money, since the people who were selling these had no clue that the situation could go so bad. But the people who were buying them obviously could see that downside coming, and were looking to cash in.

The biggest problem with CDSs is that they are an utterly opaque way to profit from inside knowledge. The question of whether they were in fact disguised inside trades needs to be looked at very closely, and if they were, then the buyers should be charged.
posted by Jimmy Havok at 12:06 PM on January 10, 2010

Are you talking about Bernie Sanders, the socialist senator from Vermont? He does kind of look like Burns but I would hardly call him evil.

Woah, no more posting before coffee for me.

No, Bernie Sanders is a pussycat.

Lawrence Summers on the other hand . . . Monty Burns.
posted by kaiseki at 12:12 PM on January 10, 2010