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Market Populism: Karl Cates

The line -- if there is one -- between free-run capitalism and the greater good.

Jan 06

AIG Confidential

Posted by kcates in Societe GeneralesecRoy BluntNew York FedGoldman SachsGeithnerDeutsche BankcomplianceCharles GrassleyBarney FrankAIG


Congress is acting like a nest of mad hornets on word that the New York Fed hid some details of AIG’s credit-default insurance payouts to big banks in late 2008.

Recall that the government was in the midst of pouring $180 billion of taxpayer bailout money into AIG at the time – and that company executives were simultaneously getting multimillion-dollar bonuses. It’s not exactly clear why NY Fed officials would actively try to keep things a secret, but it’s plain that they did, judging by an exchange of e-mail messages disclosed Thursday. The SEC was at odds with the decision and the information was released several weeks later, after things had blown over some.

In a nutshell, here’s what happened: The NY Fed had stepped in to ostensibly negotiate credit-default swap situations several banks had bought to protect them from subprime losses. The banks included Goldman Sachs, Societe Generale and Deutsche Bank. I say “ostensibly” because what the Fed recommended, and what AIG did, was pay the full value of the coverage, 100 cents on the dollar, when in all likelihood the banks could’ve been humbled into taking much less (some experts say as little as 20 cents on the dollar). A Dec. 28, 2008, public filing on the payouts was marked up by lawyers who redacted the part about the banks getting their full CDS coverage.

The NY Fed later explained the generosity was part of the government’s overall infusion into the financial sector to keep the system from collapsing, although when people eventually got wind of it last March, many said the deal amounted to a back-door bailout on top of all the money the government was putting into the banks in a variety of less secretive ways.

Why would officials at the NY Fed want to keep the details so hush-hush? Their story is that it would’ve triggered a panic – which seems absurd on its face just because a panic was already well in progress and had been for some time. The more plausible explanation, critics are saying, is that it would’ve been politically unacceptable had the public known about it when it occurred. Worth noting here is that Tim Geithner ran the NY Fed when this deal went down, although the bank is saying for the record that he was out of the loop, an assertion that has its own plausibility issues.

Charles Grassley, the Republican senator from Iowa, is having none of it, and wants Congressional hearings. The mindset to cover up bad news played a big part in creating the financial crisis in the first place," Grassley said on Thursday.

As always, the cover-up causes as much blow-back as the crime. To gauge the depth of the rancor in Congress, note that members of as disparate in every way as Barney Frank, the left-of-center liberal from Massachusetts, and Roy Blunt, the right-of-center conservative from Southwest Missouri, don't like it.

“Secretary Geithner has some explaining to do,” Blunt says in a bulletin posted today at the top of his Web site. The all-powerful Frank is less obviously outraged (he doesn’t have anything up on his Web site about it and has been a supporter of Geithner’s) but on Thursday he used the T-word, “troubling,” and said he would go along with Grassley and allow hearings.

Much of the production will revolve around Geithner and his assertion that he wasn’t involved. One of the inevitable questions: “What did he know, and when did he know it?”


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