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Secretary Geithner should resign

I first published this post on November 21, 2009… I believe it is even more the case now. Timothy Geithner serves Wall Street. Our economy and nation will not be repaired until the control of Wall Street over the government, the Federal Reserve and the nation is broken.

US Treasury Secretary Geithner should resign from office.

He represents the most visible strand of the nexus between Wall Street, the US Treasury and the Federal Reserve. This is a web of influence and advantage in which the nations largest banks have captured the monetary apparatus of our nation.

For several years I wondered why Tim Geithner did little to force the large banks to finalize their work on the settlement of credit default swaps (CDS) in the event of default. Here is a March 10, 2006 letter to Mr. Geithner from the major banks outlining what steps they were taking to create the infrastructure to handle the collapse of an entity insured by CDS… this letter was signed by these banks:

  • Bank of America, N.A.
  • Barclays Capital
  • Bear, Stearns & Co.
  • Citigroup
  • Credit Suisse
  • Deutsche Bank AG
  • Goldman, Sachs & Co.
  • HSBC Group
  • JP Morgan Chase
  • Lehman Brothers
  • Merrill Lynch & Co.
  • Morgan Stanley
  • UBS AG
  • Wachovia Bank, N.A.

Gretchen Morgenson wrote an outstanding article in the New York Times today about Secretary Geithner and AIG…. she details how Secretary Geithner feared a collapse of the financial system if AIG defaulted on its debt…  but he has been working since 2005 when he was head of the Federal Reserve Bank of New York on the issue of credit default swaps in the event of default…. (in the letter referenced above) so either he is to be blamed for not ensuring that the 2005-2006 work of the banks was completed or he is to be blamed for paying off Goldman Sachs or AIG’s other counterparties at 100 cents on the dollar.

The New York Times article…

~~~~” …The inspector noted in his report that Goldman made several arguments for why it believed it was not materially at risk in an A.I.G. default, but he is skeptical of the firm’s reasoning.

So is Janet Tavakoli, an expert in derivatives at Tavakoli Structured Finance, a consulting firm. “On Sept. 16, 2008, David Viniar, Goldman’s chief financial officer, said that whatever the outcome at A.I.G., the direct impact of Goldman’s credit exposure would be immaterial,” she said. “That was false. The report states that if the New York Fed had negotiated concessions, Goldman would have suffered a loss.”

The report says that Goldman would have had difficulty collecting on the hedges it used to insulate itself from an A.I.G. default because everyone’s wallets would have been closing in a panic.

“The prices of the collateralized debt obligations against which Goldman bought protection from A.I.G. were in sickening free fall, and the cost of replacing A.I.G.’s protection would have been sky-high,” she said. “Goldman must have known this, because it underwrote some of those value-destroying C.D.O.’s.”

Ms. Tavakoli argues that Goldman should refund the money it received in the bailout and take back the toxic C.D.O.’s now residing on the Fed’s books — and to do so before it begins showering bonuses on its taxpayer-protected employees.

“A.I.G., a sophisticated investor, foolishly took this risk,” she said. “But the U.S. taxpayer never agreed to be a victim of investments that should undergo a rigorous audit.”

Perhaps Mr. Barofsky will do that audit, and closely examine the securities that A.I.G. insured and that Wall Street titans like Goldman underwrote.

Goldman contends that it had a contractual right to the funds it received in the A.I.G. bailout and that the securities it returned to the government in the deal have increased in value.

For his part, Mr. Geithner disputed much of the inspector general’s findings. He also took issue with the conclusion that the Fed failed to develop a contingency plan for an A.I.G. rescue and largely depended on plans proffered by the banks themselves.

He said the report’s view that the Fed didn’t use its might to get better terms in the rescue was unfair. “This idea that we were unwilling to use leverage to get better terms misses the central reality of the situation — the choice we had was to let A.I.G. default or to prevent default,” he said. “We could not enforce haircuts without causing selective defaults and selective defaults would have brought down the company.”

Mr. Geithner also said that the “perception that this decision by the government, not my decision alone, was made to protect any individual investment bank is unfounded.”

Less than two weeks after the A.I.G. bailout, Mr. Geithner took the firm’s side when he criticized a Sept. 28, 2008, article in The New York Times that I wrote about the A.I.G. bailout. That article included Goldman’s statement that it wouldn’t have been affected by an A.I.G. collapse. Among other things, the article, like Mr. Barofsky’s report, questioned Goldman’s assertion.

According to an e-mail message that Goldman sent to the New York Fed at the time, Mr. Geithner talked about the article with Mr. Viniar, Goldman’s chief financial officer, before calling me. When Mr. Geithner called, he said that Goldman had no exposure to an A.I.G. collapse and that the article had left an incorrect impression about that. When I asked Mr. Geithner if he, as head of the regulatory agency overseeing Goldman, had closely examined the firm’s hedges, he said he had not.

Mr. Geithner told me on Friday that he spoke with Mr. Viniar that day to ensure that Goldman’s hedges were adequate. And, notwithstanding the inspector general’s findings, he said he still believes Goldman was hedged.

Probing, in-depth analyses of regulatory responses to the financial meltdown are worth their weight in gold. Mr. Barofsky’s certainly is. Yet in its rush to put financial reforms into effect, Congress seems uninterested in investigating or grappling with truths contained in such reports — and until it does, our country’s economic and financial system will continue to be at risk.”~~~~

* * I hope we shall crush in its birth the aristocracy of our moneyed corporations which dare already to challenge our government to a trial by strength, and bid defiance to the laws of our country. * *

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