After Helping Gordon Gekko Evade the SEC, Will Geithner Finally Now Be Fired?

by: David Sirota

Thu Jan 07, 2010 at 16:29

NOTE: I was going to post this tomorrow, but since the scandal is moving at light speed, I wanted to posted it right now as a follow on to Chris's rightfully enraged post, because the history of what's going on really explains how significant this story is. - D

Way back in May of 2009, I and others here at OpenLeft said President Obama needed to fire Treasury Secretary Tim Geithner because he was either lying or incompetent when it came to AIG. Per the norm, we were lambasted as part of the supposed fringe for saying this, just as we were lambasted for saying that the no-strings-attached bailout was a blatant giveaway to Wall Street. Now, while I'm not going to say "I told you so," I will note it's become more acceptable to say Geithner must be fired - especially after a new report that Geithner's New York Fed instructed AIG to refuse to disclose to SEC regulators some of the worst financial shenanigans surrounding the AIG bailout.

As I'll show using characters from the movie Wall Street, this kind of thing makes Gordon Gekko and Bud Fox's shenanigans look petty.

David Sirota :: After Helping Gordon Gekko Evade the SEC, Will Geithner Finally Now Be Fired?
For some history, the New York Fed, headed by Tim Geithner, bailed out AIG and then had the company famously pay back its creditors at 100 cents on the dollar. These creditors were huge banks that were taking big risky bets on mortgage-backed securities, and then buying "insurance" from AIG (more on this concept of "insurance" in a second) on potential losses on those bets. When the mortgage-backed securities lost their value in the housing bubble collapse and they called in their insurance, AIG was about to go under, until the New York Fed swept in.

If AIG had gone into bankruptcy like a normal corporation would have, there's little chance its creditors would have been paid back at 100 cents on the dollar. A bankruptcy judge or AIG shareholders/executives would have negotiated a much lower reimbursement rate. But because it was taxpayer money on the line, and because politically influential banks like Goldman Sachs can influence the  government officials who made those reimbursement decisions*, AIG paid them in full with our taxpayer dollars. Put another way, the decision to pay back AIG's creditors in full with taxpayer cash was a massive giveaway/sweetheart deal to the big banks.

Well, you say, even if normal bankruptcy proceedings might not have paid back creditors at 100 cents on the dollar, ethically, shouldn't those creditors have gotten 100 cents on the dollar for an insurance policy? Well, maybe - if the insurance policy is real insurance. But what Goldman et. al bought from AIG wasn't insurance - it wasn't regulated like a regular insurance policy because it wasn't a regular insurance policy. It was simply another risky investment called a credit default swap that both the banks and AIG deceptively called "insurance" (The banks did this to allow them to show less risk on their books and thus be able to take more risk and AIG did this to sell more credit default swaps). In fact, even calling Goldman and the other banks "creditors" of AIG isn't right - they were investors in AIG's risky schemes.

So, I'm sorry, no - when you take risks and then "cover" your risks by taking other risks, you aren't entitled - legally or ethically - to getting back 100 cents on the dollar on either set of risks. That's why they're called risks. Having the government pay out 100 cents on the dollar on those absurd risks is a taxpayer ripoff.

Now, if that sweetheart deal wasn't bad enough, we find out yesterday from Bloomberg News that the New York Fed instructed AIG executives to withhold information from the SEC about those sweetheart deals so as to prevent the public from finding out about them:

The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer's payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.

AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails (which you can see here), and AIG excluded the language when the filing was made public on Dec. 24, 2008.... The decision to pay the banks in full may have cost AIG, and thus taxpayers, at least $13 billion, based on the discount the insurer was seeking...

In a report published back in November of 2009, Treasury Inspector General  Neil Baforsky said, "Federal Reserve officials provided AIG's counterparties with tens of billions of dollars they likely would have not otherwise received" and that "the default position, whenever government funds are deployed in a crisis to support markets or institutions, should be that the public is entitled to know what is being done with government funds." Clearly the default position was the other way around - the New York Fed instructed AIG to hide damning information about public money from the public.

To understand how grotesque this really is, consider it in terms of the movie Wall Street, with Gordon Gekko as the entire AIG corporation. You can follow this simple metaphor one of two ways: First, simply imagine that Geithner - not Saul Rubinek - was the consigliere helping Gekko evade the SEC. Or, think of the end of the movie when the SEC is actively investigating  Gekko. Imagine that when SEC investigators strung up Bud Fox with a wire, the New York Fed - another branch of government - strung up Gekko with a ear piece, with Geithner or one of his aides on the other end telling Gekko how to answer Fox's questions so as to not disclose damning information.

Was the New York Fed's behavior legal or were they encouraging AIG to commit a criminal fraud? I'm not a lawyer so I don't know - but it sure seems like it could be, or at least should be. Either way, it's appalling to learn that one government agency was actively encouraging a private corporation to withhold information from another government agency, so as to prevent the public from finding out information  (in this case, a sweetheart deal to huge banks)  about the public's money - information that would seriously piss the public off.

The same man who orchestrated this is now heading the Treasury Department - the agency that is supposed to also be regulating banks. This is far more than a fox-in-the-henhouse situation - this is a Gekko-in-the-Treasury situation. And if it's not grounds for firing Geithner, then there are really no grounds to fire any government official for anything.

* Remember, the CEO of Goldman Sachs - which desperately wanted AIG bailed out because a bailout would mean it would get reimbursed billions - was the only one in the room when Treasury Secretary Hank Paulson was helping make decisions about whether or not to bailout AIG.

Tags: (All Tags)
Print Friendly View Send As Email

And we pay (0.00 / 0)
Not only have these "people" ripped off the taxpayer but the amount was hidden by trillions of Fed loans.  The Fed is a "private" corporation?  I don't buy that line.  Just a secret slush fund for the Gekkos.

And the money instantly comes out by an underfunded, poorly designed stimulus, an underfunded health bill, and the forthcoming coup on Social Security and Medicare.

four (0.00 / 0)


The government has a defect: it's potentially democratic. Corporations have no defect: they're pure tyrannies. -Chomsky

I'm gonna go out on a limb (0.00 / 0)
and say no, no he won't be fired; as my burgeoning cynicism continues to burgeon in 2010.

It will be interesting, won't it? (4.00 / 1)
"No Drama Obama" has a reputation of letting problems like this just drop off.  Many people the Left likes have been dropped the moment a scandal broke.  So by one interpretation of past events, one should expect Geithner's days are numbered.

But are they?  Or does the right hand side of the Obama administration have more protection?

[ Parent ]
OMG you are equating the horrible crimes of Van Jones! with Geitner? (4.00 / 1)
He wanted an investigation into the 911 attack, what a crime, imagine! How can soemone that obviously corrupt (he wanted an investigation!!!?) with Gietner --who just counseled hiding evidence from congressional oversight, just arranged billions of dollars without strings to his friends, partners and co workers. Thats all!



The government has a defect: it's potentially democratic. Corporations have no defect: they're pure tyrannies. -Chomsky

[ Parent ]
maybe (0.00 / 0)
if we get geitner to call for a real investigation into the wall street heist that will get him fired, hmmmmmmmm

whatever you think people owe you, that is what you owe people

[ Parent ]
Look at Bernanke (4.00 / 1)
he was reappointed. So I am inclined to think these finance guys do have more protection. The only people that have been dropped are of a more liberal bent: Van Jones, Anita Dunn, etc. It's really quite sad.  

[ Parent ]
Daschle (0.00 / 0)
Daschle was dropped pretty quickly last year, so not all of the examples of No Drama are hits to the left.  But the bulk seem to be.  (Could just be the bias of what I read here, though.)

[ Parent ]
I would consider Daschle more left than Benanke (0.00 / 0)
he may not be as left as Van Jones, but still no Robert Gates. So I would still maintain that most of the people dropped are more democratish than republicanish.

[ Parent ]
Bernanke could have been stopped (0.00 / 0)
and Geithner could be forced to resign - if there was a significant mobilization against them.  This will be difficult, as the veal pen has been pretty much kept in the box by the White House, especially when it comes to financial issues.  It's hard (but not impossible) to mobilize large groups of people without the institutional support from main line liberal groups. Then again, hopefully they are beginning to learn that they are not going to get what they have been promised (EFCA, nothing worse than the Hyde Amendment, etc.) if they keep themselves sidelined.  

One way to move the ball forward is to turn up the heat on members of Congress over their refusal to demand Geithner's resignation.  (I do think you are right that members of the Admin who are not seen as progressive, as well as the Wall Street crowd, have more insulation from popular anger than others - but that doesn't mean it can't be overcome.)

Politics is the art of the possible, but that means you have to think about changing what is possible, not that you have to accept it in perpetuity.

[ Parent ]
I agree, (0.00 / 0)
but I don't think the general public wants to try to understand all the complex issues involved in the financial crisis and therefore look to people smarter or more accomplished than them to deal with it. We all do that to a point. Finance makes a head hurt. Without enough of the public engaged there aren't going to be enough people to mobilize.
So we get what we get.  

[ Parent ]
The general public used to engage financial issues (0.00 / 0)
until a elite political movement worked, over a long period of time, to convince people that finance was too hard to understand and needed to be under the control of experts free from politics.  Of course, financial issues are complex, but that is not the problem. The problem is that the goals of people like Bernanke and Geithner are different than the goals of most Americans.  In the case of the Fed at least, I'd wager that what the American public wants is far closer to their statutory mandate than what those who control the Fed want.  

People's response to finance, like any other issue, is a product of politics. None of us, experts included, can understand any policy issue on our own - the question is whether we can draw from the insights of others to make some sense of it.  Right now, regular folks either get told to leave it to the supposed a-political experts, or they get the tea baggers narrative.  If regular folks can't make heads or tails of things right now, that is why - but it can be changed.  

Mobilization and engagement must be built up together - you can't make one happen then the other.  There are people who care about this issue that don't understand it, there are others who understand it but don't know what to do about it. You start there. There are others who would care if it could be made understandable - they come next.  A key to this is that we need to talk about values primarily, rather than policy.  Values don't make a head hurt, and they, unlike policy proposals, are effective at mobilizing people. Talking about values is the way to combat the view that finance is just for technocrats.  

Politics is the art of the possible, but that means you have to think about changing what is possible, not that you have to accept it in perpetuity.

[ Parent ]
I don't disagree with any of that (0.00 / 0)
but I do think that the reasons why AIG (Bear, Lehman, etc.) was in danger of going under are complex, and I don't need anyone to convince me of that. Without an understanding of what was happening, it would be hard to know whether or not the actions Geithner, Bernanke and Paulson, et al, took were appropriate or not -- not only in the context of their goals, but also, as you mentioned, their motivations. Therefore, the non-engaged public's interpretation is going to be formed by their choice of conduit, whether it be a political party or politician, news organization, blog, radio, etc.

Tea party protesters are engaged, but they are engaged on an emotional level. From what I have seen in interviews there isn't much of an understanding of the situation, it is more about buzzwords: taxes, bail out, socialism, etc. And though I agree that issues should be framed by values, mobilizing solely by values can be simplistic -- I think tea party protests are an example of that.

I wasn't implying that the public is stupid or lacking in intellectual curiosity; I just think that in the big picture people are worried about how all of this stuff directly affects them, not the ins and outs of political battles. And the news is couched in those terms and it's tedious. So I wonder how many people know or care enough about Geithner or Bernanke to mobilize in response to them; particularly since they are policy makers creating policies that the public may not realize have a direct effect on them (e.g., prime rate).

And to go along with my cynicism: Does it really matter when we do mobilize? The majority of the people (according to polls) wanted a public option and the elected officials still gave us the finger... Disheartening to say the least.

[ Parent ]
I agree with most of what you said too (0.00 / 0)
Part of the problem, I think, is that we mean something different by mobilize.  It's true that a majority supported the public option, but not that they were mobilized - in the sense of being actively engaged with the issue, committed to acting on the issue, committed to acting in concert with others on the issue.  Our side did not do that, while the other side did. Public opinion on its own does not affect politics - but when opinions can be turned towards action, it does.  When I speak of acting to mobilize people, I mean making efforts to offer then new conduits for understanding and learning.

Like you, I doubt most people know or care about these two individuals to act on that basis - but I do think they understand and care about the state of the economy and the massive amount of money that has gone to help Wall Street and the lack of help that has gone to most people.  They believe that government should s for all of us, not just for some of us, but that this does not describe our present situation. That is the basis for making appeals to them, which may get them to become engaged on the issue of firing Geithner, reforming the Fed, or regulating Wall Street.

To take Bernanke as an example, I don't need to know his motives in order to oppose him - because he has said things about his goals which are ridiculous and inconsistent with his statutory mandate.  As for Wall Street, both parties spent over a decade seeking to deregulate Wall Street (they were quiet explicit about this), moving us closer to a pre-New Deal system for governing the finance sector.  This led to a bubble and crash.  We can argue over the details - and people who understand them better then I do should take the lead - but that deregulatory movement was an unmitigated disaster.  As for their response, it was largely to hand them money with no strings attached, with no effort made to ensure that this wouldn't happen again (like breaking up too big to fail institutions, or changing the incentive structure so that people that ruin companies or the economy don't get bonuses.)

Politics is the art of the possible, but that means you have to think about changing what is possible, not that you have to accept it in perpetuity.

[ Parent ]
I concur (0.00 / 0)
On the issue of mobilization though, I feel that the health care vigils and protests, as well as the housing protests (where people have refused to leave after eviction or just moved into foreclosed houses), some indirectly allowed by local law enforcement, went under-reported in the media. And I think it is because they were peaceful, respectful events.

But if you send a bunch of ignats into a town hall meeting with big mouths and racist, ignorant, incendiary propaganda, the news teams run right out to cover them. If it bleeds it leads.

So I do think we are thinking of the same thing regarding mobilization, maybe because I was in NYC I was insulated -- maybe there weren't exhibitions in support of health care other places. I  wouldn't know because the news didn't cover it. I do know that there were many events in NYC.

The financial stuff, I think it's not just the general public that throws up their hands when it comes to unraveling all the derivative damage but many lawmakers as well. Thus we remain stuck with the architects of the crisis (Rubin acolytes...) maybe out of desperation. Who knows?

I love Taibbi's writing about Goldman and the government, I don't know if it is intentionally pernicious or nefarious but I do think it is a mentality, seeking instant gratification without much thought about the danger in the long run, that got us to where we are today. Greed and carelessness.

The unraveling of the regulatory devices gave birth to this; I just wonder if there is a real desire to remedy it in the upper echelons of government. I am starting to feel like a Ron Paullite...

Honestly, I often think where's my bailout? How about offering citizens a 0% interest rate loan to pay off all their debt. Thereby recapitalizing the lenders, but no, that would only allow the masses some freedom. Let's let the lenders make the money back by charging the debtors 30% interest and ridiculous fees that they can't afford anyway. Thereby creating another clusterf****. But I digress...

[ Parent ]
It "should" be more acceptable (4.00 / 1)
to say Geithner is a shifty weasel who MUST go, but don't you dare say it around Dkos or Huffpo. The "Obama administration can do no wrong that we can't ridiculously hyper-rationalize" crowd will come down on you like a ton of bricks. If anything, they're getting more aggressive, more arrogant, and more intolerable.

100% payouts on "Naked" CDS were even worse (0.00 / 0)
A naked CDS is an "insurance" policy sold to an investor who does NOT own the MBS or other security issued by the entity identified in the CDS.  Thus, Goldman was betting on the failure of a company in which it had no interest. [What are the chances Goldman helped to sink companies against which it had bought naked CDS?]

These naked CDSs were illegal as one cannot buy an insurance policy on an event where they have no insurable interest. E.g., I can't buy a life insurance policy on you because I would have a perverse incentive to kill you with no countervailing interest in seeing you live as your family, company or mortgage lender do.  

As such, issuance of such insurance policies to one with no "insurable interest" has always been against public policy and these policies have been unenforceable.

These naked CDS were illegal but instead of refusing to pay-off on an illegal contract, Geitner paid them off @ 100 cents on the dollar.

More than enough to fire this guy, if not send them all to jail.

This scandal is starting to make Watergate look blase' n/t (0.00 / 0)
Sigh (0.00 / 0)
It's sad that the party of Andrew Jackson has resorted to this.


Open Left Campaigns



Advanced Search

Powered by: SoapBlox