Guess whose mistake it was? Then New York Fed President Timothy Geithner.
For some background on this payouts, read The Real Screw Job: AIG used as a Funnel of U.S. Taxpayer money.
Here's the money quote from the SIGTARP report, right in the summary:
- The original terms of federal assistance to AIG, including the high interest rate it adopted from the private bank’s initial term sheet, inadequately addressed AIG’s long term liquidity concerns, thus requiring further Government support.
- FRBNY’s negotiating strategy to pursue concessions from counterparties offered little opportunity for success, even in light of the willingness of one counterparty to agree to concessions.
- The structure and effect of FRBNY’s assistance to AIG, both initially through loans to AIG, and through asset purchases in connection with Maiden Lane III effectively transferred tens of billions of dollars of cash from the Government to AIG’s counterparties, even though senior policy makers contend that assistance to AIG’s counterparties was not a relevant consideration in fashioning the assistance to AIG.
- While FRBNY may eventually be made whole on its loan to Maiden Lane III, it is difficult to assess the true costs of the Federal Reserve’s actions until there is more clarity as to AIG’s ability to repay all of its assistance from the Government.
Fellow bloggers, it sure doesn't feel good to be so right. Yes, AIG was used as a funnel of U.S. taxpayer money on glorified gambling bets as noted in the Screw Job post.
Even more amazing, as the crisis unfolded, the New York Fed did not do it's own due diligence on AIG, instead relied on an analysis previously performed by JPMorgan Chase (which Chase decided against due to the overall crisis and capital preservation).
FRBNY did not develop a contingency plan in the event that the private financing did not go through and did not conduct an independent analysis regarding the appropriate terms for Government assistance to AIG; instead it used in substantial part the economic terms of the private sector deal, albeit for $85 billion instead of the $75 billion prepared by JPMorgan Chase for the unsuccessful private sector solution.
SIGTARP went after the ultimate question, why were payouts by AIG made at par, or 100%?
Some interesting notes:
Then-FRBNY President Geithner and the FRBNY General Counsel told SIGTARP that the financial condition of the counterparties was not a relevant factor in the decision to create Maiden Lane III and pay counterparties effectively at par.
This is a shocking statement! With taxpayer money, Tim Giethner did not even consider the reality these counterparties could indeed take a major reduction in payout and not be affected substantially.
One of the biggest reasons they paid out at 100% was the fact counterparties knew the government had already rescued AIG.
It's also fairly clear from the report, if AIG had been allowed to go into bankruptcy, the taxpayer would have been way better off.
A bankruptcy possibility would have left strong room for negotiation with counterparties.
Even more astounding was UBS offered a 2% discount from full value and Geithner ignored this because all counterparties should be treated equally.
I mean some of Geither's reasoning is absurd. Treat foreign banks the same as U.S. banks, oops, it's unethical to use one's regulatory status to pressure counterparties to take a hair cut?
My God! We saw Hank Paulson completely intimidate 9 banks into taking TARP funds. They couldn't use some tactics to not pay out CDSes at 100%, which also were way above market value at that time?
They are the Federal Reserve! Supposedly we have this massive financial Armageddon and they are playing
patsy nice and worrying about ethics? How about the ethics of dumping a massive bail out onto the unsuspecting taxpayer?
Even more astounding, AIG still has $34.3 Billion in credit default swap exposure related to CDOs.
Chief Risk Officer and AIGFP’s CEO, AIGFP expects that the majority of its remaining credit default swap contracts will be unwound over the next several years. However, in recent SEC filings, AIG warned that, if credit markets continue to worsen, AIG could be exposed to these risks for a significantly longer period of time and experience additional losses.
One thing SIGTARP notes is how the possibility of a down grade by credit ratings agencies influenced the New York Fed Reserve in their decision making.
When reading this report I could not help but believe they should have let AIG go into bankruptcy. We'll never know if letting AIG go into bankruptcy would truly have caused the catastrophe as claimed.
GM did and obviously the world did not end.
While discussions go on and on about financial collapse and loss of jobs and so forth....what do we have today? Well, Wall Street is happy, banks are fat with taxpayer dough and we have ...loss of jobs and also a massive deficit.
You know what else we still have? Billions in credit default swaps.
I highly recommend reading the entire report. If you have been following this beyond belief debacle called the AIG bail out, the report reads like a Stephen King novel of absurdity, stupidity and horror show.