Is the Fed the central bank of the U.S. or...?

or the central bank for "Hank" Greenberg and Goldman Sachs. Bloomberg is out with a very interesting story that raises a lot of questions that probably will not get answered: "New York Fed’s Secret Choice to Pay for Swaps Hits Taxpayers".

The first question that comes to mind is why Timothy Geithner Treasury Secretary. Actually, we know the answer to that questions: protector of the financial oligarchy.

Back to the Bloomberg story:

In the months leading up to the September 2008 collapse of giant insurer American International Group Inc., Elias Habayeb and his colleagues worked nights and weekends negotiating with banks that had bought $62 billion of credit-default swaps from AIG, according to a person who has worked with Habayeb.

Habayeb, 37, was chief financial officer for the AIG division that oversaw AIG Financial Products, the unit that had sold the swaps to the banks. One of his goals was to persuade the banks to accept discounts of as much as 40 cents on the dollar, according to people familiar with the matter.

[emphasis added]

After the first bail out of AIG, the New York Federal Reserve led by Timothy Geithner takes over negotiation with AIGs counter parties:

Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps -- insurance-like contracts that backed soured collateralized-debt obligations.

Boy, we are lucky to get our hands on that draft term sheet because guess what it said:

Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar. The content of its deliberations has never been made public.

Wow. AIG was negotiating haircuts then NY Fed and Tim Geithner takes over negotiations and what happens - 100% pay outs. But guess what - the substance and content of the negotiations have not been made public. I wonder why.

Maybe because it will support the idea that the Fed is the central bank to Goldman Sachs:

The deal contributed to the more than $14 billion that over 18 months was handed to Goldman Sachs, whose former chairman, Stephen Friedman, was chairman of the board of directors of the New York Fed when the decision was made.

Mr. Friedman, Mr. Conflict of Interest, Mr. Chairman of the Board of the NY Fed and stockholder and board member of Goldman Sachs:

In December 2008, weeks after the payments to the banks were authorized in November, Friedman bought 37,300 shares of Goldman stock at $80.78 a share, according to SEC filings. On Jan. 22, he bought 15,300 more at $66.61.

Both purchases took place before the payments to Goldman Sachs were publicly disclosed under pressure from Senator Dodd in March. On Oct. 26, Goldman Sachs stock closed at $179.37 a share, meaning Friedman had paper profits of $5.4 million.

Wow, that's nice. These types of deals are only available to the financial oligarchy. A financial oligarchy that has its protectors in the White House right now.

But it continues. This Bloomberg story raises some questions about why was AIG allowed to function when it was essentially bankrupt:

Janet Tavakoli, founder of Chicago-based Tavakoli Structured Finance Inc., a financial consulting firm, says the government squandered billions in the AIG deal.

“There’s no way they should have paid at par,” she says. “AIG was basically bankrupt.”

AIG was bankrupt which would mean that shareholders would get wiped out and who was the biggest shareholder of AIG - Mr. Maurice "Hank" Greenberg.

Now, Geithner and the other protectors of the financial oligarchy may say they didn't have they authority to takeover AIG. Don't believe the bullshit. AIG was supposed to be supervised by the Office of Thrift Supervision (OTS). The same OTS that was responsible for WaMu, Indy Mac and Countrywide. But guess what OTS was not prepared to handle AIG's complex schemes and LIES:

"We missed the impact" of the collateral triggers, said C.K. Lee, who ran a little-known team in the U.S. Office of Thrift Supervision, or OTS, which oversaw AIG's finance unit. He said the swaps were viewed as "fairly benign products" until they overwhelmed the trillion-dollar company.

The government announced this morning that it had restructured and expanded its aid package for AIG, bringing the total to $150 billion($) in loans and investments.

Though Lee's team had red-flagged the AIG unit that handled swaps, sampled some of the contracts and knew about collateral provisions, no one recognized the extent of the risk, he said.

Instead, examiners mostly concurred with the company's repeated assurances that any risk in the swaps portfolio was manageable. They went along in part because of AIG's huge capital base, Lee said, and because securities underlying the swaps had top credit ratings.

So, what we have is an entire financial system set-up to protect and help a small group of people - financial oligarchy. This will not change until the financial sector is made smaller and much less powerful. This won't happen as long as Timothy Geithner is Treasury Secretary.

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Something is very fishy.

So far we have the following reactions:

From Yves Smith: unconstitutional

From Zero Hedge: Goldman Sachs LIED

The Bloomberg raises another question: If it was common knowledge that banks already hedged against CDOs or even wrote down the value then why did the Fed pay 100%?

In fact we know that Goldman Sachs did just that:

On March 20, Goldman Sachs CFO David Viniar said in a conference call with investors that Goldman was protected.

“We limited our overall credit exposure to AIG through a combination of collateral and market hedges,” Viniar said. “There would have been no credit losses if AIG had failed.”

Unless, of course, like George Washington on Zero Hedge, Viniar is lying. - Financial Information for the Rest of Us.

The Fed Responds to Bloomberg report

in the Washington Post:

The Federal Reserve Bank of New York said Tuesday that it had no choice but to instruct American International Group last November to reimburse the full amount of what it owed to big banks on derivatives contracts, a move that ended months of effort by the insurance giant to negotiate lower payments.

Fed officials offered the explanation in a rare response to a media report after Bloomberg News said that the New York Fed, led at the time by then-President Timothy F. Geithner, directed AIG to make the payments after it received a massive government bailout. The officials said AIG lost its leverage in demanding a better deal once the company had been saved from bankruptcy.


New York Fed officials explained that the main reason creditors were willing for a time to accept less than full reimbursement was their fear of an AIG bankruptcy. The government's rescue of the company removed that threat and left the company with virtually no way to wrestle concessions from the banks.

"In its negotiations with its counterparties, AIG just didn't have the same bargaining power that it did with the Federal Reserve standing in the background," said Thomas C. Baxter, New York Fed's general counsel. "The only sensible outcome was to give them what they were legally entitled to."

No leverage? Still, if counter parties already hedged against counter party risk or wrote down those positions then they didn't need full payment. According to Bloomberg report the Fed just stepped in and started "negotiating".

The other excuse was that they didn't have time to negotiate with each party so it was easier and quicker to just give them all full payment. Come on?

Bloomberg did win an initial court battle to unseal telephone records and other terms of these agreements but the Fed has appealed that decision.

a href=""">"> - Financial Information for the Rest of Us.

sounds like B.S. to me

Uh, they are the government and without them, there was no AIG to even make partial payments.