Dominic Rushe
January 10, 2010
THE $182.3 billion (€126.5 billion) bailout of AIG is getting more costly by the day for the Obama administration. New revelations last week cast the spotlight back on Tim Geithner, the Treasury secretary who played such a vital role in the credit crunch bailouts.
For all the attacks on the bailouts from Obama’s opponents, it’s worth remembering that this is a situation he inherited and the money started flowing under George Bush junior. But Geithner was Hank Paulson’s batman under Bush — so if anyone deserves flak, it’s him.
In late 2008, after helping to light the fire under the biggest destruction of wealth in living memory, AIG managed to fan the flames further when it was revealed the insurer paid a total of $62.1 billion to settle the contracts with investment banks, often paying 100c on the dollar.
Average investors were left to burn but the bankers got their cash back in full. The news came after Uncle Sam had injected $85 billion of taxpayers’ cash into the teetering insurer. That handout has now grown to $182.3 billion.
Now it appears that as the money started to roll, the Federal Reserve Bank of New York, then under Geithner, was urging AIG to limit disclosure on payments made to banks. Emails show AIG staff, soon to become social pariahs and the target of death threats, arguing for more disclosure only to be discouraged by officials.
The messages were obtained by Darrell Issa, Republican representative of California and ranking member of the House oversight and government reform committee. “It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information to the Securities and Exchange Commission,” Issa said in an emailed statement.
It’s not the first time the payments have been attacked. An earlier investigation by Neil Barofsky, the special inspector general for the bailout Troubled Asset Relief Program (Tarp), found that banks such as Goldman Sachs, Deutsche and others were paid top dollar for contracts then valued at a fraction of those prices. AIG was apparently attempting to negotiate cuts of up to 40% on some of these contracts.
It’s for historians and economists to debate whether they would have been successful, and the consequences success would have had for the banking system as a whole.
That the government didn’t seek to save the taxpayer any money looks pretty bad. Its defence will no doubt be that it didn’t have time.
But the unarguable scandal at AIG is that the US taxpayer was made to pay the bill without being shown the cheque.
New York Fed representatives have said Geithner was “recused [disqualified] from matters dealing with specific companies”, as he was preparing to be nominated as Treasury secretary in late 2008. But as the man with the plan, Geithner has a lot of questions to answer.
On Friday, the top Democrat and House financial services chairman Barney Frank, the man who helped push through the Tarp, said he was “troubled” by the reports. He’s supporting a hearing on the revelations — just what Obama needs.
But perhaps a full accounting is the only antidote for AIG’s toxic debt. It’s a scandal that nobody got one in the first place.
