AIG Bailout: Corrupt, Regulator-Organized Gift to Few Privileged Banks

The AIG "bailout" was a conspiracy organized and carried out on behalf of certain privileged banks by the New York Fed, then headed by now-Treasury Secretary Tim Geithner. Given HUGE leeway for regulators by Obama, it raises red flags about US future
 
July 10, 2010 - PRLog -- 08 July 2010. By David Caploe PhD, Editor-in-Chief, EconomyWatch.com

I – Saving AIG ???

When the government began rescuing A.I.G. from collapse

in the fall of 2008 with what has become a $182 billion lifeline,

it was required to forfeit its right to sue several banks —

including Goldman, Société Générale, Deutsche Bank and Merrill Lynch —

over any irregularities with most of the mortgage securities it insured in the precrisis years.

But after the Securities and Exchange Commission’s civil fraud suit filed in April against Goldman for possibly misrepresenting a mortgage deal to investors,

A.I.G. executives and shareholders are asking whether A.I.G. may have been misled by Goldman into insuring mortgage deals that the bank and others may have known were flawed.

This month, an Australian hedge fund sued Goldman on similar grounds.

Goldman is contesting the suit and denies any wrongdoing.

II – Who Knew What When ???

Unknown outside of a few Wall Street legal departments, the A.I.G. waiver was released in May

by the House Committee on Oversight and Government Reform

amid 250,000 pages of largely undisclosed documents.

The documents, reviewed by The New York Times,

provide the most comprehensive public record of how the Federal Reserve Bank of New York and the Treasury Department

orchestrated one of the biggest corporate bailouts in history.

The documents also indicate that regulators ignored recommendations from their own advisers

to force the banks to accept losses on their A.I.G. deals

and instead paid the banks in full for the contracts.

That decision, say critics of the A.I.G. bailout, has cost taxpayers billions of extra dollars in payments to the banks.

It also contrasts with the hard line the White House took in 2009

when it forced Chrysler’s lenders to take losses when the government bailed out the auto giant.

Analysts say the documents suggest that regulators were overly punitive toward A.I.G.

and overly forgiving of banks during the bailout —

signified, they say, by the fact that the legal waiver undermined A.I.G. and its shareholders’ ability to recover damages.

“Even if it turns out that it would be a hard suit to win,

just the gesture of requiring A.I.G. to scrap its ability to sue is outrageous,”

said David Skeel, a law professor at the University of Pennsylvania.

“The defense may be that the banking system was in trouble, and we couldn’t afford to destabilize it anymore,

but that just strikes me as really going overboard.”

“This really suggests they had myopia and they were looking at it entirely through the perspective of the banks,” Mr. Skeel said.

Regulators at the New York Fed declined to comment on the legal waiver

but disagreed with that viewpoint.

“This was not about the banks,” said Sarah J. Dahlgren, a senior vice president for the New York Fed who oversees A.I.G.

Last month, the Congressional Oversight Panel,

a body charged with reviewing the state of financial markets and the regulators that monitor them,

published a 337-page report on the A.I.G. bailout.

III – Why No Consideration for Alternatives ???

It concluded the Federal Reserve Bank of New York did not give enough consideration to alternatives

before sinking more and more taxpayer money into A.I.G.

“It is hard to escape the conclusion that F.R.B.N.Y. was just ‘going through the motions,’ ” the report said.

About $46 billion of the taxpayer money in the A.I.G. bailout was used to pay to mortgage trading partners

like Goldman and Société Générale, a French bank, to make good on their claims.

The banks are not expected to return any of that money,

leading the Congressional Research Service to say in March that

much of the taxpayer money ultimately bailed out the banks, not A.I.G.,

a point we have made here at Economy Watch any number of times.

Even with the financial “reform” legislation that Congress recently introduced,

David A. Moss, a Harvard Business School professor, said he was concerned that

the government had not developed a blueprint for stabilizing markets when huge companies like A.I.G. run aground,

and, for that reason, regulators’ actions during the financial crisis need continued scrutiny.

“We have to vet these things now because otherwise, if we face a similar crisis again,

federal officials are likely to follow precedents set this time around,” he said.

Under the new legislation, the Federal Deposit Insurance Corporation will have the power to untangle the financial affairs of troubled entities,

but bailed-out companies will pay most of their trading partners 100 cents on the dollar for outstanding contracts.

But Sheila C. Bair, the chairwoman of that very same F.D.I.C., has said that

trading partners should be forced to accept discounts in the middle of a bailout.

Regardless of the financial parameters of bailouts, analysts also say that

real financial reform should require regulators to demonstrate much more independence from the firms they monitor.

IV – An Embarrassing Deference by Regulators

In that regard, the newly released Congressional documents show New York Fed officials deferring to bank executives

at a time when the government was pumping hundreds of billions of taxpayer dollars into the financial system

to rescue bankers from their own mistakes.

While Wall Street deal-making is famously hard-nosed with participants fighting for every penny,

during the A.I.G. bailout, regulators negotiated with the banks in an almost conciliatory fashion.

On Nov. 6, 2008, for instance, after a New York Fed official spoke with Lloyd C. Blankfein, Goldman’s chief executive, about the Fed’s A.I.G. plans,

the official noted in an e-mail message to Mr. Blankfein that he appreciated the Wall Street titan’s patience.

“Thanks for understanding,” the regulator said.

From the moment the government agreed to lend A.I.G. $85 billion on Sept. 16, 2008,

the New York Fed, led at the time by Timothy F. Geithner, and its outside advisers all acknowledged that a rescue had to achieve two goals:

stop the bleeding at A.I.G. and protect the taxpayer money the government poured into the insurer.

One of the regulators’ most controversial decisions was awarding the banks that were A.I.G.’s trading partners

100 cents on the dollar to unwind debt insurance they had bought from the firm.

V – No Alternatives ???

Critics have questioned why the government did not try to wring more concessions from the banks,

which would have saved taxpayers billions of dollars.

Mr. Geithner, who is now the Treasury secretary, has repeatedly said that as steward of the New York Fed,

he had no choice but to pay A.I.G.’s trading partners in full.

But two entirely different solutions to A.I.G.’s problems were presented to Fed officials

by three of its outside advisers, according to the documents.

To read more at http://www.economywatch.com’, go to: http://www.economywatch.com/economy-business-and-finance-...
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