Testimony Reveals Need for
Thorough Investigation of AIG Deals
01/28/2010 - by William Black
http://www.newdeal20.org/?p=7904
William Black calls for a deeper investigation of the conflicts of interest
that shaped the AIG bailout.
The truly extraordinary disclosures were that Paulson, Bernanke, and
Geithner all purported to have had no involvement in one of the most
expensive decisions in history - the decision to pay 100 cents on the dollar
to the least deserving of recipients (and who, if Geithner's testimony were
to be believed, did not need to receive that largess) - and the unprincipled
and indefensible decision to try to get AIG to cover up that fact and the
beneficiaries of that largess. Indeed, Bernanke testified that he entered
into an oral recusal (such recusals have to be put in writing under Office
of Government Ethics rules) that meant that at the most critical time in
financial regulation in 80 years an "acting" official was left in charge of
all regulatory decisions at the NY Fed. This is bizarre because he was one
of the rare senior public officials that did not have a clear conflict of
interest due to their Wall Street ties.
Those senior officials, e.g., Paulson, that had clear conflicts of interest
did not recuse themeselves and Goldman Sachs was the biggest single
recipient of what two Fed Members aptly labeled a "gift" from the taxpayers.
Worse, the acting Fed President reported to the NY Fed Board and its Chair,
Stephen Friedman (of Goldman), who purchased a large block of Goldman stock
in December 2008. (Rep. Issa has charged that this indicates he was trading
on inside information that produced a large investment profit.) This was
such an outrageous conflict of interest that other regional Fed banks were
outraged. Worse, the Fed staff approved Friedman's conflict of interest.
Still worse, he did not inform the Fed of his large purchase of Goldman
shares in December 2008 (just after it received $12.9 B from the taxpayers
(via AIG)).
Note that (1) Friedman was a Class C "Public Interest" director for the NY
Fed ("Hi, I'm from Government Sachs and I'm here to represent the public's
interest"), (2) that Baxter was his leading defender (yep, the same NY Fed
General Counsel that pushed the AIG cover up), and (3) and that the WSJ
story logically should have noted that Geithner had recused himself during
November and December 2008 because that fact would have been relevant to
their study and they obviously wrote the story on the basis of interviews
with senior NY Fed staff - but it does not. That makes it even more dubious
that Geithner recused himself and/or it means that the NY Fed officials were
trying to avoid public knowledge of the recusal. Baxter, as NY Fed GC,
should have been involved in the recusal and screening procedures (again,
mandated by OGE rules, particularly for nominees requiring Senate
confirmation.
Analytically, the key development was the failure of the Committee to point
out that all of Geithner's arguments about the financial catastrophe that
was (purportedly) certain if AIG were to spin off its trading unit and place
it in bankruptcy proved the opposite of his conclusion about leverage.
Recall that Lehman had gone done and every big AIG counterparty was
desperately seeking federal aid and regulatory forbearance. They knew that
if they tried to collect on their CDS they would cause AIG to fail and that
they would be risking (1) getting zero cents on the dollar on their CDS (or,
at most, whatever grossly inadequate collateral AIG had pledged), (2)
royally pissing off every developed nation in the world - at a time when
they needed government bailouts, liquidity lines, and regulatory
forbearance. In sum, the very facts Geithner stressed in his testimony
provided the government with the ultimate in negotiating leverage,
particularly if, as Geithner testified, none of the counterparties needed to
collect on the AIG CDS to remain healthy - (personally, I find Geithner's
claim dubious). Stiglitz's new book, Freefall, points out that other
distressed sellers of CDS "protection" during this period negotiated
settlements in which they paid 13 cents on the dollar.
It was downright humorous to see Geithner purport to be affronted that
anyone might be concerned that Goldman, and Goldman alums drawing federal
paychecks, might serve Goldman's interests. As Liar's Poker emphasized,
there's always a "fool" in the game. Thanks to Geithner, Bernanke, Friedman,
and Paulson the U.S. taxpayer was that "fool" - and AIG was their tool.
Actually, my favorite is their decision to use AIG to secretly bail out UBS.
Switzerland is a rich nation, why should we pay to bail out transactions
that were never federally insured? But it gets better. We bailed out UBS
while we were prosecuting them for massive tax fraud involving exceptionally
wealthy Americans that were seeking to evade some of the lowest marginal
income tax rates in the developed world. So, in economic substance, U.S.
taxpayers paid the "fine" that UBS purported to pay to end the prosecution
and gave UBS roughly $4.25 billion extra as a lagniappe. (Oh, and the Swiss
courts just decided to shaft us by refusing to comply with the disclosures
of the indentities of the U.S. tax cheats required under the settlement with
UBS.) So, we are now the global "fool."
It is inconceivable that Bernanke should be reappointed before his role, and
the role of his agency, in the twin AIG scandals (the give away and the
cover up) are investigated.
This post originally appeared on New Economic Perspectives .
Roosevelt Institute Braintruster William K. Black is an Associate Professor
of Economics and Law at the University of Missouri-Kansas City. He is a
white-collar criminologist and was a senior financial regulator. He is the
author of The Best Way to Rob a Bank is to Own One .
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