Geithner must go

[CARLHAYDEN]

From the Huffinton Post:

The latest revelations about the New York Fed's actions in the AIG bailout make one thing clear: Treasury Secretary Tim Geithner must go.

Geithner must go not just because of the emails showing that his New York Fed ordered AIG to keep details of the bailout secret, but because of many other decisions and policies he has championed in the past two years.

These decisions and policies have consistently put the interests of Wall Street ahead of the interests of the taxpayer, and they have undermined the public's confidence in the government at a time when the country needs it the most.

Tim Geithner's defense of his actions continues to be, in effect, "We had to do it or the world would have ended." This isn't good enough. It is also, at the very least, debatable.

It is true that Tim Geithner made many of his decisions in the midst of a crisis, and I do not doubt that his intentions were good and that he was doing the best he could. But this does not rinse his hands of responsibility for his decisions or their ongoing ramifications.

For five reasons, Geithner must go:


    * Geithner was directly responsible for the most appalling corporate bailout in U.S. history, in which tens of billions of taxpayer dollars were secretly funneled to some of the richest corporations in the world. The terms of this bailout, and the associated cloak of secrecy under which it was conducted (the details of which continue to leak out) have hurt the public's confidence in the government.

    * Geithner's ongoing decision to save banks at any cost was predicated on the theory that this would keep the banks lending. This policy has failed: The banks have not continued to lend. What the banks HAVE done is coin billions of dollars of profits risk-free at taxpayer expense, fueling even more public outrage.

    * Geithner's policy of "too big to fail" has created a banking system whose bets are guaranteed by the US taxpayer, and it has distorted lending and market forces across the entire economy. This policy, which has now been all but written into the Constitution, is grossly unfair. Big banks can do whatever they want with no concern about the consequences; small banks have to hunker down or they'll get taken over and shut down.

    * Geithner's role in the AIG bailout, which the current administration bears no responsibility for, continues to destroy confidence in his current boss, President Barack Obama. If AIG stays in the headlines, and Geithner does not accept responsibility for what happened. Obama's agenda and influence will continue to suffer.

    * Geithner's consistent decision to put Wall Street first has helped fuel a populist rage that will make it very difficult for the government to do anything more to help the financial system. If the recovery continues, such help might never become necessary. If it falters, however, Geithner's policies will have severely curtailed the government's ability to do anything about it.


Those who know him say that Tim Geithner is a very good guy. He made the decisions above in the midst of a panic, and I have no doubt that he was trying to do the right thing.

But contrary to the revisionist history now being promulgated, these actions were not the only way out. They were grossly unfair to taxpayers, and they have undermined public confidence in the government -- and our current President -- at a time when the country needs it most

[Beet]

This is silly. Geithner had recused himself of all AIG work by the time this decision was made, and it was done at such a low level within the NY Fed that he wasn't even informed of the decision. Yet people are latching onto the fact that he was still titular head of the NY Fed in order to blame him personally. The merits of the action is also, at the very least, debatable.

So what does this whole brou-ha-ha tell us? It tell us that people are mad, and they want blood, but we already knew that. But just a few points of response

* If the bailout is so unfair, why has every country in the world bailed out its banks? Including Dubai? Even Iceland would have done it if it were possible. Every country in the world, singularly, has pursued the exact same policy, might that give even the tiniest, weeniest bit doubt that there is some merit in this policy?

* People argue from one side that the policy failed because the banks aren't lending, and from the other side that the crisis was caused by too much lending. You can't have it both ways: either reckless expansion of lending is good, or it is bad. The reality is that banks are still lending, not as much as they were during the bubble, but more than they would be without the government rescues.

* I agree with the author that Geithner is well intentioned and doing his best. He may not be very politically savvy, and admittedly that could be a problem. But I wish people would understand that these things aren't as simple to deal with. Perhaps if there were more high profile takedowns of executives, and the passage of the 50% bonus tax as the UK and France have done, that would help matters.

[CARLHAYDEN]

This is silly. Geithner had recused himself of all AIG work by the time this decision was made, and it was done at such a low level within the NY Fed that he wasn't even informed of the decision. Yet people are latching onto the fact that he was still titular head of the NY Fed in order to blame him personally. The merits of the action is also, at the very least, debatable.

So what does this whole brou-ha-ha tell us? It tell us that people are mad, and they want blood, but we already knew that. But just a few points of response

* If the bailout is so unfair, why has every country in the world bailed out its banks? Including Dubai? Even Iceland would have done it if it were possible. Every country in the world, singularly, has pursued the exact same policy, might that give even the tiniest, weeniest bit doubt that there is some merit in this policy?

* People argue from one side that the policy failed because the banks aren't lending, and from the other side that the crisis was caused by too much lending. You can't have it both ways: either reckless expansion of lending is good, or it is bad. The reality is that banks are still lending, not as much as they were during the bubble, but more than they would be without the government rescues.

* I agree with the author that Geithner is well intentioned and doing his best. He may not be very politically savvy, and admittedly that could be a problem. But I wish people would understand that these things aren't as simple to deal with. Perhaps if there were more high profile takedowns of executives, and the passage of the 50% bonus tax as the UK and France have done, that would help matters.

Lets take your assertions one at a time.

Do you really want to assert that every country bailed out its banks?

Next, since murders occur every year in most countries, is murder acceptable.

Let is then turn use of the "excluded middle" fallacy.  It is neither because the banks were lending too much nor too little in the aggregate, but rather than the banks were putting their customers money in bad financial instruments (CDO anyone).

As to your suggestion that Geithner's motives are pure.  You are free to believe that, but it simply is NOT the case.

[opebo]

'Pure motives'?  Ha ha.

Anyway, there are several points worth making here:

1. The system is 'at fault' - capitalism.
2. Within this terrible system, Geithner operated both as he must in a technical way (yes, collapse would have occurred otherwise), and in a 'power relationships' sense - he must do as capital needs/demands, as capital has all the power.
3.  The real problems are two - two sides of the same coin - that capitalism is a permanent and institutionalized 'bail out' of the privileged class, and that the poors/working class are never 'bailed out', also as an institutional and permanent condition.

I really have to say that it seems especially comical to hear right-wingers such as Carl complaining about Geithern, when he is just a cog in a machine they profess to love.

[frihetsivrare]

http://www.doomdaily.com/2010/timothy-geithner-faces-possible-criminal-charges-over-aig-coverup/

[CARLHAYDEN]

Goldman Sachs-AIG: It's Likely Worse Than You Think
By James Keller

The Goldman Sachs-AIG scandal may be worse than we think. Former New York Fed President and current Treasury Secretary Timothy Geithner is being castigated for paying off AIG's counterparties - Goldman foremost among them - 100 cents on the dollar and then keeping these payments secret. But it seems likely that Goldman actually got much more than 100%. What is worse, Goldman may have received this windfall by trading on information that was deliberately withheld from the public.

A brief recap of the Goldman-AIG story is necessary. Goldman has revealed that it had $20 billion in trades on with AIG, where it had bought protection on various toxic assets from AIG. Goldman believed this translated into $10 billion of risk to AIG, meaning that the mortgage assets might be worth as little as 50%. Against this $10 billion of AIG risk, Goldman had $7.5 billion in collateral from AIG. The rest of the risk, $2.5 billion, was hedged with Credit Default Swaps, whereby Goldman bought protection on AIG from a variety of highly rated banks. Goldman felt it was well-hedged, thus the repeated claim that it was not at risk if AIG defaulted.

The result of all this hedging was that a crisis at AIG would become a crisis at whatever banks Goldman had used to hedge its AIG exposure. Through its purchase of protection on toxic assets from AIG, and subsequent purchase of protection on AIG, Goldman created a situation whereby its risk to AIG became systemic risk.

Unfortunately for Goldman's critics, this is all fair play. If Goldman's purchase of AIG protection from other banks created a doomsday scenario, it was someone else's problem. Many on Wall Street have realized that being perfectly correlated with the end-of-the-world usually works out just fine.

Thus far in the story, none of the facts are really in dispute. One can criticize Goldman for creating a scenario where the only way it could fail was if the whole world imploded, but we might also commend the firm for its good risk management.

Therefore, the criticism of Geithner for "giving away the store" is overly harsh. Geithner had limited options. Through its swaps with AIG, Goldman had the power to start the chain of events that would destroy AIG. And through its hedges, GS had the power to ensure that this failure would reverberate through the rest of the banking system. It was a form of financial mutually assured destruction. Therefore Goldman's unyielding position was that it intended to collect from AIG 100% of what it was owed. Bet is to you, Mr. Geithner.

It is easy to hope that a New York Fed president would have had a bit more fortitude to play out the next turn of the cards. But we should not be surprised that Geithner blinked, folded, and paid the bill in full.  The Fed's decision to keep these payments secret is less defensible.

If this were the end of the story, one would have no recourse but to grit and maybe buy stock in Goldman Sachs. But the story does not quite end there. The bigger story, still unexplored by regulators and Goldman's critics, concerns that $2.5 billion in protection Goldman had acquired before the crisis hit. What became of those hedges? What did Goldman Sachs do with its AIG protection?

Goldman spokesman Lucas van Praag made a disingenuous case in a letter to the Wall Street Journal last April. He implied that nothing much became of the hedges: "In order to collect under a credit default swap, there has to be an event of default. No event of default means no payout." Goldman would have us believe that since AIG did not default, the CDSs expired and vanished forever.

This is not quite right. A company can avoid default, but one can make a lot of money selling protection on the company when everybody else thinks they are going to default. That is especially true if one has been involved in meetings with the Fed where the subject of the meetings was how to avoid such a default. A good trader buys protection when a company seems very safe, and sells it when the company seems very risky. It is not appropriate for a trader to sell protection when he has non-public information that the risks have diminished, that the government has unequivocally committed to saving this company.

When did Goldman sell its $2.5 billion of AIG protection? Goldman representatives have said that the protection was sold in the six months following the September 15, 2008 bailout loan. This is problematic. That is so because the details of the bailout were not released until March 15 of last year, when the famous AIG counterparty payments at last became public.

This suggests that Goldman sold its protection to counterparties that knew materially less about the actual risk of AIG than Goldman did. Remember that this bailout was specifically designed to avoid an AIG default, the event that forces Credit Default Swaps to be triggered. Goldman, in frequent conversations with Paulson and Geithner, knew that the government had just committed $85 billion to avoid exactly this outcome.

The rest of the world, purposely kept in the dark, saw the risk of an AIG failure as imminent. In fact, on September 21, 2008 then-Treasury Secretary Paulson went on Meet the Press and explained that the $85 billion bailout loan would "allow the government to liquidate this company." Paulson may have been speaking loosely, but in the specific language of Credit Default Swaps a government "liquidation" is a Credit Event akin to bankruptcy and would "trigger" these swaps. This is why, immediately after the bailout was announced, the cost of protecting AIG risk skyrocketed. It rose to more than 40% of the amount hedged; meaning that Goldman, which had $2.5 billion in hedges, would have been sitting on over a $1 billion profit.

Not bad, even for Goldman. The government had just met their collateral calls, their risk to AIG was gone, and their hedges were in the money by $1 billion. What to do now? The right thing is to not sell the protection until the full details of the bailout are in the public domain. To wait until you have no material, non-public information.

It appears Goldman did not wait until after March to sell its protection. Yet Goldman has denied making a windfall gain on AIG. AIG CDS protection ended the second quarter of 2008 at about 200 basis points. From September 15, 2008 to March 15, 2009 AIG CDS never closed below 400 basis points. It is hard to see how Goldman could not have had a windfall. Depending on when Goldman sold this protection, the gain could have been as much as $1.5 billion. This would mean that while most of AIG's counterparties got 100 cents on the dollar, Goldman actually got far more.

Criticism of Geithner seems appropriate. Paying counterparties 100 cents on the dollar was unnecessary. Keeping the whole thing a secret was indefensible. Allowing windfall profits was unconscionable. But the Fed's behavior may not be the worst element of this episode.

Frankly, it is hard to see how, in having sold its AIG protection before March 2009, that Goldman Sachs can avoid the appearance that these trades were improper. Over a year on, we still await a clear explanation of how much the firm made from this protection and how its subsequent sale can be justified when Goldman had information that the federal government was deliberately keeping from the public.




 

[dead0man]

* If the bailout is so unfair, why has every country in the world bailed out its banks? Including Dubai? Even Iceland would have done it if it were possible. Every country in the world, singularly, has pursued the exact same policy, might that give even the tiniest, weeniest bit doubt that there is some merit in this policy?

Ahhh, the old "everybody else is doing it so it must be a good idea" argument....classic.  And Israel didn't.  I'd bet dollars to donuts they were not alone either.

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Yeah, there can't be a middle ground when it comes to credit, it's all or nothing!  Seriously, that's your argument?

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Or we could try not letting people fail up to positions of power like we have with Geithner, Paulson and Bernanke.

[Derek]

It's time for him and all the other tax cheats to go in the Obama Administration. Corporate tax loop holes? Are you kidding me Obama? How bout all the tax cheats in your administration? Let's give every one of them life in jail before we run our mouths about the corporate taxes. When I'm president corporate taxes will be unconstitutional. I hail the man who starts a corporation in this country.

[jokerman]

Selling out Geithner as a scapegoat to populism, in my opinion, would appear very disingenuous and wouldn't work.

[Beet]

* If the bailout is so unfair, why has every country in the world bailed out its banks? Including Dubai? Even Iceland would have done it if it were possible. Every country in the world, singularly, has pursued the exact same policy, might that give even the tiniest, weeniest bit doubt that there is some merit in this policy?

Ahhh, the old "everybody else is doing it so it must be a good idea" argument....classic.  And Israel didn't.  I'd bet dollars to donuts they were not alone either.

No that's not the argument. The argument is that the government rescues prevented an even more catastrophic collapse that would have cost everyone far more money, and the weasels in Washington knew it. In fact the reason we have 10% unemployment and so much pain now is that the rescues were not even larger and more decisive.

The fact that almost all other countries in the world saved their banks (including Israel...NO major Israeli bank or banking group collapsed in 2008-09, and when they did almost collapse, the 1983 bank stock crisis, the Israeli government nationalized all of the banks), not only in 2008-09, but virtually throughout history, does raise the bar for those who argue that it's only because "the government is in the hands of the banksters". You have to assert that not only is the US government circa 2008 "in the hands of the banksters" but that every government in the world, and every government in history, has always been in the hands of the banksters, and not a single one was ever led by any politician of character whatsoever. That is a more difficult assertion and one that I certainly disagree with.

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Yeah, there can't be a middle ground when it comes to credit, it's all or nothing!  Seriously, that's your argument?[/quote]

What are you talking about? I'm not saying it's all or nothing, I'm saying you can't have it both ways. Did you even read what I wrote? Apparently not. Commenting purely from emotion...

[Torie]

Geithner is not going anywhere. When push comes to shove, the Senate is not going to go off the populist cliff, and there will be something like exactly 60 votes for cloture.  Suck it up.

[Beet]

Geithner is not going anywhere. When push comes to shove, the Senate is not going to go off the populist cliff, and there will be something like exactly 60 votes for cloture.  Suck it up.

You mean Bernanke?

[Torie]

Geithner is not going anywhere. When push comes to shove, the Senate is not going to go off the populist cliff, and there will be something like exactly 60 votes for cloture.  Suck it up.

You mean Bernanke?

Ya. I did. Ouch!  I just wanted to lash out at this populist nonsense, and be as provocative as possible. Hopefully, I will have better luck next time.

[Derek]

It's not just Giether, it's alot of others in the administration. The senate I don't think will ever have the 60 votes. Too many dems will be running for the hills soon. If they do they will lose 100 house seats and the Republicans will override any veto they want.

[Sam Spade]

Geithner is not going anywhere. When push comes to shove, the Senate is not going to go off the populist cliff, and there will be something like exactly 60 votes for cloture.  Suck it up.

You mean Bernanke?

Ya. I did. Ouch!  I just wanted to lash out at this populist nonsense, and be as provocative as possible. Hopefully, I will have better luck next time.

Opposition to Bernanke is not necessarily just populist nonsense. (though obviously some who oppose him are doing just for such reasons)

I have plenty of reasons.