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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NO GOOD CHOICES ON AIG
Geithner said because the United States had no authority to seize and wind down complex financial firms that were in danger of collapse, it had no choice but to step in when the failure of AIG appeared imminent in September 2008.
High unemployment has sparked complaints that Washington was quick to rescue Wall Street but ignored the plight of those who lost their jobs in a recession blamed partly on chancy lending.
“Conservatives agree that as point person you failed. Liberals are growing in that consensus as well,” Brady said during a tense exchange with Geithner. “For the sake of our jobs, will you step down from your post?”
In response, Geithner defended the actions he and others in the Obama administration had taken to restore financial calm and economic growth.
The Treasury chief used his testimony to press his case that action on reforms was needed before the impetus for change fades.
He said no financial firm should be able to escape regulation, and the largest institutions need oversight from a single, strong regulator.
“The regulation of the largest, most interconnected
firms requires tremendous institutional capacity, clear lines of authority and single-point accountability. This is no place for regulation for council or by committee,”
he said.
As part of a sweeping reform plan, the Obama administration has proposed that the Federal Reserve be given powers to oversee the largest financial firms, and Geithner’s comments signaled opposition to proposals to give this authority to a council of existing regulators.
“The stakes are simply too high to allow diffuse authorities and responsibilities to weaken accountability,” Geithner said.
Geithner said he expected U.S. economic growth to continue in the fourth quarter and into 2010 but argued that the United States’ long-term stability and strength could not be ensured without a broad revamp of financial regulation.
“Unfortunately, the regulatory regime that failed so terribly leading up to the financial crisis is precisely the regulatory regime we have today,” Geithner said.
“To ensure the vitality, the strength and the stability of our economy … we must bring our system of financial regulation into the twenty-first century,” Geithner said.
http://blogs.reuters.com/financial-regulatory-forum/2009/11/19/us-treasury-chief-geithner-under-fire-defends-aig-bailout/
AIG Still Isn’t Too Big to Fail
By LUCIAN BEBCHUK
The AIG bailout — at $170 billion and rising — may end up as the costliest rescue of a single firm in history. There is much debate about bonuses paid to AIG’s executives. But there is far too little debate on the government’s willingness to back all of AIG’s obligations.
The company claims any failure by the government to do so would have catastrophic consequences. This claim is exaggerated. Serious consideration should be given to forcing AIG’s partners in derivative transactions — which are mainly buyers of credit default swaps from the company — to take a substantial haircut.
AIG is a holding company, conducting most of its business through insurance subsidiaries organized as separate legal entities. The financial products subsidiary, which has produced the huge losses from derivative transactions that brought AIG down, is also a separate legal entity — but AIG has guaranteed the subsidiary’s obligations.
While AIG has thus far been able to cover derivative losses using government funds, the possibility of large additional losses must be recognized. AIG recently stated that it still has about $1.6 trillion in “notional derivatives exposure.” Suppose, for example, that AIG ends up with losses equal to, say, 20% of this exposure — that is, $320 billion. Suppose also that the value of AIG’s current assets, including the shares in its insurance subsidiaries, is $160 billion. In this scenario, the government’s fully backing AIG’s obligations would produce an additional loss of $160 billion for taxpayers. Should the government be prepared to do so?
The alternative would be to put AIG into Chapter 11. In this case, AIG’s creditors, including its derivative counterparties, would obtain the company’s assets. They would end up with a 50% recovery on their claims, bearing those $160 billion of losses themselves.
AIG recently stated that failure to meet all of the company’s obligations could lead to a “run on the bank” by customers seeking to surrender insurance policies and “would have sweeping impacts across the economy.” But insurance policyholders wouldn’t be at risk if AIG failed to meet its obligations. The insurance subsidiaries are not responsible for the debts of their parent AIG, and insurance policy claims are backed both by the subsidiaries’ required reserves and state insurance funds.
Still, what about the concern that losses to derivative counterparties — which are now known to include major U.S. and foreign banks — would substantially deplete the capital of some of them? That concern would be best addressed by the U.S. government (or foreign governments in the case of their banks) infusing capital directly — in return for shares — into the banks that need it. There is no reason to back AIG’s obligations as an instrument for infusing capital (with taxpayers getting nothing in return) into, say, Goldman Sachs or Spain’s Banco Santander.
It is true that the collapse of Lehman Brothers last September led to a crisis of confidence among depositors in banks and money-market funds, which had a dramatic effect on markets. Letting AIG’s derivative counterparties take a significant haircut, however, should not lead to such a crisis. AIG’s obligations are to derivative counterparties, not to depositors. Moreover, governments world-wide are now committed to backing fully the claims of depositors in financial institutions.
It is important to understand that the government can also employ intermediate approaches between fully backing AIG’s derivative obligations and no backing. For example, the government could place AIG in Chapter 11, but commit to provide supplemental coverage that would make up any difference between the value that creditors would get from AIG’S reorganization and, say, an 80% recovery. Such an approach could allow setting different haircuts for different classes of creditors. The government, for example, might elect not to provide such supplemental coverage to executives owed money by AIG.
At a minimum, the government should conduct “stress tests,” estimating potential losses in alternative scenarios, and formulate a policy on the magnitude and fraction of derivative losses it would be willing to cover. A policy that doesn’t fully back AIG’s obligations should be seriously considered.
Mr. Bebchuk is a professor of law, economics and finance, and director of the corporate governance program at Harvard Law School. This op-ed is based on his forthcoming paper, “Is AIG Too Big To Fail?”
http://www.law.harvard.edu/faculty/bebchuk/opeds/03-20-09_WSJ_OpEd.pdf
JPMorgan Chase CEO ‘lined up as Timothy Geithner replacement’
23 November 2009
JPMorgan Chase chief executive officer Jamie Dimon is being considered as a potential replacement for current Treasury secretary Timothy Geithner, it has been reported.
Mr Geithner has faced a barrage of criticism from the Republican Party in recent weeks over his failure to cut unemployment, improve the strength of the dollar and speed up the pace of economic recovery.
According to a report in the New York Post, policymakers have floated the idea of Mr Dimon as a potential alternative for the post.
His reputation has soared during the financial crisis, with JPMorgan Chase strengthening its market positions through manoeuvres that included the acquisition of Bear Stearns.
Dick Bove, a banking industry analyst at Rochdale Securities, said that it was vital the US had a Treasury secretary who had the necessary experience in the sector and the full support of Congress.
“That is not Timothy Geithner,” he said.
“It is Jamie Dimon.”
Last month, JPMorgan Chase reported third quarter net income of $3.6 billion, up from $527 million in the same period in 2008.
http://www.bobsguide.com//guide/news/2009/Nov/23/JPMorgan_Chase_CEO_‘lined_up_as_Timothy_Geithner_replacement’.html
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