Wednesday, January 27, 2010

They're Going After Geithner: Issa Report Very Damaging

A Special Report by Darrell Issa: "Public Disclosure As A Last Resort: How the Federal Reserve Fought to Cover Up the Details of the AIG Counterparties Bailout From the American People," is out.

Issa is the ranking Republican on the House Committee where Geithner will testify today.

Here are some key excerpts from the report:

Officials from the Federal Reserve and the Treasury Department have repeatedly attempted to mislead the American people into believing that these transactions were a responsible use of taxpayer money.

For example, Treasury spokesman Andrew Williams recently argued,

Those investments have turned out to be very sensible, and the fund at the center of the controversy [ML3] is on track to return every dollar to
taxpayers, and may well yield a profit.

These claims assume that one focuses only on the $27.1 billion in direct outlays to AIG’s counterparties, and measures the current value of the securities in ML3 against this price. However, this comparison is deceptive and dishonest, since it ignores the fact that the FRBNY also allowed the counterparties to keep an additional $35 billion in collateral.


Members of Congress continued to try to obtain information about thecounterparty payments. On March 5, 2009, Fed Vice Chairman Donald Kohn testified before the Senate Banking Committee, where Senators criticized the FRBNY’s decision to keep the names of the counterparties secret. After Vice Chairman Kohn’s disastrous appearance before the Senate Banking Committee, FRBNYAssistant Vice President.

Alex Latorre mused: “I wonder if there is away to get [Congress] off the fixation on counterparty names ….”

The day after Vice Chairman Kohn’s testimony, the FRBNY began to comprehend that they weren’t going to be able to keep the names of the counterparties from Congress. FRBNY staff member James Bergin e-mailed several other FRBNY staff:

I have to think this train is probably going to leave the station soon and we need to focus our efforts on explaining the story as best we can. There were too many people involved in the deals – too many counterparties, too many lawyers and advisors, too many people from AIG – to keep a determined Congress from the information.


Throughout the fall of 2008 and the spring of 2009, the FRBNY and its lawyers at Davis Polk reviewed and approved all of AIG’s draft SEC filings, not just those that dealt directly with the counterparty payments. The FRBNY used this power to prevent embarrassment to the Fed. On at least one occasion, pressure from the FRBNY appears to have resulted in a violation of disclosure rules.

On November 17, 2008, AIG was about to make a required filing to disclose a new compensation package for its CFO, David Herzog. AIG shared its draft filing with Davis Polk. The filing disclosed that Herzog was about to rake in millions of dollars in bonuses.

Less than 40 minutes after receiving the draft filing from AIG, Davis Polk senior partner Marshall Huebner sent a frantic e-mail, entitled “READ ME,” to the FRBNY’s General Counsel, Thomas Baxter: “Sometimes I really do feel like evil gremlins are running this deal somehow. Very bad timing to have this [filing] come out just before the Secretary [Henry Paulson] and the Chairman [Ben Bernanke] go before Waxman …”72 Huebner asked Baxter, “Is there any chance – and maybe it is just too late – to get the Herzog comp package unagreed to? … [W]e could help get the package changed/fixed before itis disclosed.” This issue, Huebner said, needed
to go “right to [AIG CEO] Ed [Liddy] right now."

Apparently, the FRBNY’s coercion succeeded in getting Herzog’s compensation package “unagreed to,” for AIG never made the filing.


The SEC’s disclosure rules are intended to protect investors by ensuring that they receive all material information about public companies’ business and financial condition. The FRBNY’s interference with AIG’s disclosure obligations was not in AIG’s investors’ interests, or in the public interest. Instead, the FRBNY’s goal was
to avoid public scrutiny of the embarrassing details of the bailout.


When asked directly if he was involved in the efforts by the FRBNY to prevent disclosure of the AIG counterparty payments, Secretary Geithner responded, “I wasn’t involved in that decision.” On January 8, 2010, FRBNY General Counsel Thomas Baxter wrote Ranking Member Issa to clarify the role of then-President Geithner:


M]atters relating to AIG securities law disclosures were not brought to the attention of Mr. Geithner …. In my judgment as the New York Fed’s chief legal officer, disclosure matters of this nature did not warrant the attention of the president.

Mr. Baxter reiterated this claim in an interview with Committee staff. Questions of securities disclosure, Baxter said, were “legal stuff,” and Baxter did not bring legal stuff to the attention of then-President Geithner. However, Baxter said that “on significant policy issues, of course I would go” to Geithner.

However, documents received by the Committee suggest that Secretary Geithner was, at a minimum, engaged personally in reviewing what information about the AIG bailout would be revealed to Congress and the public. On November 6, 2008, Sarah Dahlgren, the FRBNY’s lead staff member in AIG’s operations, e-mailed Geithner with a proposed statement regarding AIG’s upcoming equity capital raise for Geithner’s approval:

I]n terms of saying something publicly about our intentions, we … think that saying something that conveys the following … makes sense:

It is our(Federal Reserve/Treasury) continued intention to put the company in a sound capital position and exit the facility/preferred securities/common stock ownership as soon as practicable…

[I]f you are good with this, …we would also make sure that the company
sticks to this line (echo)….

At a minimum, the cover-up of the details about AIG’s counterparty payments began on Secretary Geithner’s watch, and the culture of the FRBNY in which this behavior occurred reflected his leadership. Secretary Geithner needs to explain his role in the cover-up, and if he thinks the behavior of his staff at the FRBNY was appropriate.


According to SIGTARP:

Then-FRBNY President Geithner and the FRBNY General Counsel [Tom Baxter] told SIGTARP that the financial condition of the counterparties was not a relevant factor in the decision to create [ML3] and pay counterparties effectively at par.
Secretary Geithner’s claim is contradicted by internal FRBNY communications obtained by the Committee.


Secretary Geithner’s claim to SIGTARP that the backdoor bailout of AIG’s counterparties had nothing to do with the health of AIG’s counterparties also raises questions about why AIG was bailed out in the first place.


Secretary Geithner’s inconsistent statements and apparent contradictions raise important questions about the decision to not only funnel billions of taxpayer dollars to AIG’s counterparties, but also the decision to bail out AIG itself.

1 comment:

  1. Congress scrutinizing "Geithners inconsistent statements" simply lends credability to the bail-out process. Its one group of lying thieves trying to expose another group of lying thieves.

    The only good thing about reporting on this mess is to show the american people that by supporting these institutions they are supporting a gang of looters who are robbing the american people blind. STOP VOTING IT ONLY ENCOURAGES THEM.