GeithnerGate: Obama's Treasury Sec. Should Get the Boot and Let's Take Our Money Back Too
Editor's Note:Published below Les Leopold's article is Dylan Ratigan's 5-point takedown of Geithner and why it's time for him to go.
"An arm of the Federal Reserve, then led by now-Treasury Secretary Timothy Geithner, told bailed-out insurance giant AIG to withhold key details from the public about overpayments that put billions of extra tax dollars in the coffers of major Wall Street firms, most notably Goldman Sachs." Huffington Post
Cover-up revelations keep coming about Timothy Geithner's secret assistance to AIG. The latest show that he urged AIG not to disclose how it would be shoveling money to Goldman Sachs and other large financial institutions by paying off its credit default swaps at par value instead of much less.
More than $60 billion changed hands that shouldn't have if Geithner had played hard ball. Therefore, the charge is that Geithner should be bounced because he was protecting the banks' interests ahead of the public interest. He may also have protecting himself during his confirmation hearings.
Ok, string him up. But what about recapturing the loot?
Before we pull the rope, let's take a closer look at this outrageous scam. During the bubble years, AIG conducted an extremely lucrative business guaranteeing all kinds of derivatives based on risky debt. They couldn't call it insurance because insurance products are regulated --- meaning you need to have reserves to back them up, which they didn't. So these toxic assets insurance polices instead got the fancy name "credit default swaps," which were not and still are not regulated. (Take a bow Phil Gramm, Robert Rubin, Bill Clinton and Alan Greenspan.)
This was the mother of all profit making businesses for AIG because in many of these deals AIG didn't have to put up any collateral as long as AIG was AAA-rated. The counter-parties (i.e. Goldman Sachs, JP Morgan Chase...) figured AIG was good for it. So AIG raked in fees for insuring toxic assets and didn't have to put up anything in return. Free money!
AIG figured the best hedge and the most money could be made by insuring more and more of this risky stuff. This was thought to disperse the risk broadly since all of the junk debt couldn't possibly fail at the same time, could it? They "insured" over $450 billion worth. (For the sordid details and comic relief, please see The Looting of America )
Then, the unthinkable happened. The assets tanked and AIG had to pay up on its policies, but couldn't. It was about to fold. Had AIG gone under it may have pulled with it hundreds of other financial institutions around the world that were relying on its insurance. The government stepped in to bail them all out. (AIG now spreads the fiction that this was just one rogue operation over in England in an otherwise safe and sound empire. But the big boys at the top of AIG all knew the credit default swap operation was a delectable source of enormous profits and shared in the booty... and they're not giving back any of the ill-gotten gains.)
We can argue some other time about whether or not some kind of bailout was necessary or what we should have gotten in return. The point here is that big fat financial houses like Goldman Sachs would have received pennies on the dollar for their AIG-backed credit default swaps had AIG gone into bankruptcy court. Instead, Goldman and others received par value and that money is now funding their mammoth profits and bonuses. (Spewing more corporate fiction, Goldman Sachs and JP Morgan Chase say they had been carefully hedged and would not have suffered from an AIG bankruptcy. Baloney. If AIG had gone under without a Federal rescue, those big banks would have gone down too or teetered on the edge.)