Report targets Geithner, Bush over ‘back-door’ bailout of AIG creditors

November 17, 2009

(ChattahBox) — A report issued Monday by a government watchdog details how the Federal Reserve under the leadership of Timothy Geithner now the nation’s Treasury Secretary failed to use its considerable leverage” to force major banks to make concessions on the money they were owed as part of their relationships with AIG, leaving taxpayers holding the empty bag. The audit by the Special Inspector General for the Troubled Asset Relief Program (TARP) claims that major Wall Street firms, most notably Goldman Sachs, Merrill Lynch and Wachovia got 100% of the value of complicated financial instruments that they had insured with AIG to the tune of $60 billion, “an amount far above their market value at the time,” the report notes. UBS actually conditionally agreed to accept a 2 percent cut in what it was owed, but since negotiations with the other counterparties proved fruitless, the Fed paid them off in full, like everyone else including foreign interests such as Deutsche Bank for $8.5 billion.

The inspector general Neil M. Barofsky’s conclusion is that, “Tens of billions of dollars of government money was funneled inexorably and directly to A.I.G.’s counterparties.”  The Fed’s initial rush last fall to save AIG — and thereby avoid a widespread market meltdown — “was done with almost no independent consideration of the terms of the transaction or the impact that those terms might have on the future of AIG,” Barofsky said.

In a letter to Barofsky included in his report, the Fed said it “would not have been appropriate to use our supervisory authority on behalf of AIG to obtain concessions from domestic counterparties.” Doing so would have been a “misuse” of power that would have given an advantage to non-U.S. banks, the Fed said. Those claims ring hollow as the Treasury Secretary Henry Paulson forced banks to take TARP funds, during the crisis, even if they did not need the government money, and pushed Bank of America (BAC) to buy Merrill Lynch. Critics have suggested that the Bush administration gave Goldman Sachs, the biggest counterparty to AIG,  a “backdoor bailout” in part because of a close relationship between senior treasury officials and executives at the bank.

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