A report from the inspector general of the TARP program holds Timothy Geithner, then head of the New York Federal Reserve and now Treasury Secretary, responsible for the disaster of the AIG bailout:
A brutal report issued Monday by a government watchdog holds Timothy Geithner — then the head of the Federal Reserve Bank of New York and now the nation’s Treasury Secretary — responsible for overpayments that put billions of extra tax dollars in the coffers of major Wall Street firms, most notably Goldman Sachs. . .
Instead of bargaining with AIG’s numerous counterparties to resolve its billions of dollars in souring derivatives contracts, Geithner’s team ended up paying top dollar for toxic assets — “an amount far above their market value at the time,” the report notes.
“There is no question that the effect of FRBNY’s decisions — indeed, the very design of the federal assistance to AIG — was that tens of billions of dollars of Government money was funneled inexorably and directly to AIG’s counterparties,” the Office of the Special Inspector General for the Troubled Asset Relief Program said.
Wall Street firms like Goldman Sachs, Merrill Lynch and Wachovia got full value for their derivatives contracts with AIG, and taxpayers got the bill. In total, $27.1 billion of public money was transferred to companies that did business with AIG.
Throughout the bailout of AIG, the report says, the New York Fed failed to develop appropriate contingency plans; failed to properly assess the impact of its decisions; and generally engaged in negotiation strategies that were doomed to fail.
Then, after Geithner’s team paid off AIG’s counterparties on Wall Street, it imposed “onerous” terms on the troubled insurer, the report says.
(ASIDE: That’s a Huffington Post summary, but it all seems to be backed up by the report.)
The report also blasts the New York Fed’s deliberate lack of transparency:
The now familiar argument from Government officials about the dire consequences of basic transparency, as advocated by the Federal Reserve . . once again simply does not withstand scrutiny. Federal Reserve officials initially refused to disclose the identities of the counterparties or the details of the payments, warning that disclosure of the names would undermine AIG’s stability, the privacy and business interests of the counterparties, and the stability of the markets.
After public and Congressional pressure, AIG disclosed the identities. Notwithstanding the Federal Reserve’s warnings, the sky did not fall; there is no indication that AIG’s disclosure undermined the stability of AIG or the market or damaged legitimate interests of the counterparties. The lesson that should be learned — one that has been made apparent time after time in the Government’s response to the financial crisis — is that 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.
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