Tuesday, November 17, 2009

Audit Criticizes Federal Reserve Bank of New York for Handling of AIG Bailout

The New York Times reports that a government investigation faults the Federal Reserve Bank of New York for failing to use its "considerable leverage" when it decided to pay AIG's banking creditors the full value of their insured risk. AIG "insured" risky financial transactions of its investment banking clients, like Goldman Sachs. AIG, however, failed to maintain enough reserve assets to cover to extent of the financial risk it insured. When the investments soured, the investment banks came to collect from AIG, which sent the company into financial ruin.

Federal regulators at the Federal Reserve Bank of New York, the Federal Reserve, and the Treasury Department, however, stepped in to provide assistance to AIG, which ultimately meant covering its obligations to creditors. A prior blog entry on Dissenting Justice discusses the connections that many of the federal regulators had to Goldman Sachs, which received nearly $13 billion from AIG after the federal government rescued the company. Here is a quote from that essay:
Henry Paulson, Secretary of Treasury during the Bush administration, is a former Chairman of Goldman Sachs. Paulson was responsible for administering TARP, and he had a large role in structuring the legislation.

Robert Rubin, Secretary of Treasury during the Clinton administration, was a Co-Chairman of Goldman (along with Stephen Friedman -- see below) before he earned a Cabinet post. Although Rubin does not have a formal position in the Obama administration, he has served as an informal economic advisor to the President. Also, current Secretary of Treasury Tim Geithner worked as an assistant to Rubin (and later to Lawrence Summers -- former Secretary of Treasury and current head of Obama's National Economic Council) when he headed the agency. Paulson was also a partner at Goldman when Rubin was Co-Chairman.

Mark Patterson, Geithner's Chief of Staff, is a former lobbyist for Goldman. Obama waived his anti-lobbying rules in order to secure the job for Patterson.

Tim Geithner, current Secretary of Treasury, served as the President of the Federal Reserve Bank of New York until his current position. In that capacity, he helped to structure the federal bailout of AIG. Geithner, unlike many of the other individuals listed in this article, never worked at Goldman, but he worked for Rubin during the Clinton administration and for Summers, who replaced Rubin. Summers heads Obama's National Economic Council.

Stephen Friedman, the current Chairman of the Federal Reserve Bank of New York, was the Co-Chairman of Goldman with Rubin, and he has held several other executive positions at the company. In his current position, Friedman presumably will have a significant role in the ongoing federal bailout of AIG. Friedman also sits on the board of directors of Goldman.
According to the New York Times, federal auditors challenged Goldman Sachs, which argues that it should not have been forced to collect from AIG in a bankruptcy proceeding. Earlier reports (including an entry on Dissenting Justice) argued that the federal government should have forced AIG, like the auto industry, to go into bankruptcy, and that Goldman Sachs likely would not have collected nearly as much money from the troubled insurer. The auditors confirm the position taken in these previous reports.

Goldman Sachs, however, continues to deny that it received preferential treatment; Geithner also says that Goldman Sachs did not benefit from a backroom deal. But as the auditors' report states, regardless of the parties' intent, "[t]ens of billions of dollars of government money was funneled inexorably and directly to A.I.G.’s counterparties." This story will likely continue to unfold.


Anonymous said...

What needs also to be investigated is the fact that most if not all of the firms at the root of the 2008 Financial Disaster : A.I.G., BearStearns , Lehman Brothers, Merrill Lynch and Citi had give out billions of dollars in bonuses, salaries, stock options, cash, perks and huge buy-outs of key stockholders from January , 1, 2008 to September , 1, 2008 , and the media is mum ! about this , most of the losses of these firms are due to the key stockholders and executives getting out with the " Big Load " right before the 2008 meltdown, but they are mostly powerful neocons, so D.C. is silent , as usual...and that's the real crime !


Darren Lenard Hutchinson said...

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liberal dissent said...

Not that it makes it any better, but I honestly think a lot of these guys are not doing this to help out their buddies, but doing it because by being in Goldman Sachs they got a skewed sense of it, and investment banking's, importance. They get it into their heads that if Wall Street goes the world will collapse, and see themselves as working to prevent that.

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