Special Inspector: AIG Counterparty VOLUNTEERED to Take a Haircut, But Geithner Refused → Washingtons Blog
Special Inspector: AIG Counterparty VOLUNTEERED to Take a Haircut, But Geithner Refused - Washingtons Blog

Monday, November 16, 2009

Special Inspector: AIG Counterparty VOLUNTEERED to Take a Haircut, But Geithner Refused

I received an advance copy of the Special Inspector General for Tarp's Report called "Factors Affecting Efforts to Limit Payments to AIG Counterparties", which will be released tomorrow (posted below).

The report reveals that at least one counterparty indicated that it was willing to take a reduced payout on its credit default swaps. In other words, then-head of the Federal Reserve Bank of New York - Tim Geithner - wouldn't have had to even play hardball to get a concession from the counterparty.

But Geithner ended up dictating that all of AIG's counterparties get full payment - with no haircuts for anyone (except the American taxpayer).

The report includes these gems:

  • As a policy matter, FRBNY was unwilling to use its leverage as the regulator for several of the counterparties to compel concessions, in part because in the negotiations it was acting as a creditor of AIG and not as the counterparties' primary regulator
  • Also as a policy matter, FRBNY was uncomfortable with violating the principal of sanctity of contract.

Well sure, that makes sense. A creditor doesn't want to negotiate hard and demand concessions from its debtor, now does it?

Apparently, while Geithner was concerned with the sanctity of the CDS contracts (which - I would argue - were all based on fraudulent representations concerning how safe an investment they were), he didn't care very much about the sanctity of the agreement of a government to do what is best for its people.

But actually, the New York Fed isn't a government agency. The Fed itself maintains that:

While the Fed’s Washington-based Board of Governors is a federal agency subject to the Freedom of Information Act and other government rules, the New York Fed and other regional banks maintain they are separate institutions, owned by their member banks, and not subject to federal restrictions.

So really Geithner - as head of the private bank-owned and managed New York Fed - was simply serving his constituency: the giant New York money center banks. Geithner's constituency never was the American public.

The giant banks were the creditors of the giant banks. Like two sock puppets putting on a big show of good cop / bad cop show, the New York Fed pretended that it was negotiating hard, but ended up making sure that the boys got their full cut.

SIGTARP Report Nov 16 -

Update: The New York Times says that the bank which agreed to a haircut was UBS.


  1. The self-dealing and incest grow ever more sickening as fascism takes hold in the light of day. Thank you GW, for fighting the good fight and rising above unavoidable outrage fatigue. You are already a hero of the next revolution.

  2. This is why the Fed needs to be made either entirely federal or the member banks made entirely private with the central bank functions assumed by Treasury. Congress could set up a separate central bank if they wish to maintain the independence of the Fed chairman. However, properly understood, the function of the Fed is primarily to set the target overnight rate. It's regulatory functions could easily be assigned to a separate entity, and should be, since there is no inherent connection with regulation of the financial system and central bank operations.

    The present private public partnership, often represented as a quasi-governmental institution, is not working, because the banking system is its own administrator and regulator. This is just creating cover for a scamming operation.

    Also, the country desperately needs to be educated into the reality of how the monetary system works. Money (HPM) is a creation of the government as a sovereign (monopoly) provider of a non-convertible currency within a flexible rate system (since 1971). As a result, the government is not revenue constrained, nor is it limited by any fixed external relationship.

    As a result, money (HPM) is a public utility. The government's responsibility is to provide enough net financial assets for the system to work efficiently, and neither too little, creating an output gap, nor too much, leading to overheating. It is the responsibility of Congress to erect a suitable system for doing this and overseeing it in order to ensure that it is meeting its objective of providing for the general welfare responsibly.

    The present Federal Reserve System was constructed in 1913, and it needs to be reviewed and improved to meet current conditions based on current understanding of modern monetary theory as distinct from neoliberal monetarism. (See L. Randall Wray, Understanding Modern Money (1998), available online at Google Books here. This means jettisoning the neoliberal monetarist myth that has been discredited so badly by this crisis.

  3. The findings from this suggests more layers of government regulation and you guys favor that?
    No doubt the past results from a failed institution such as this had negative results for the taxpayers but allowing additional layers of regulatory agencies to take over would just make it worse.


→ Thank you for contributing to the conversation by commenting. We try to read all of the comments (but don't always have the time).

→ If you write a long comment, please use paragraph breaks. Otherwise, no one will read it. Many people still won't read it, so shorter is usually better (but it's your choice).

→ The following types of comments will be deleted if we happen to see them:

-- Comments that criticize any class of people as a whole, especially when based on an attribute they don't have control over

-- Comments that explicitly call for violence

→ Because we do not read all of the comments, I am not responsible for any unlawful or distasteful comments.