Tim Geithner's $14 Billion Gift to Goldman Sachs


Tim Geithner should be given the option to resign immediately, or be fired. He is either incompetent, too conflicted to do his job with the banks properly, or most likely, both.

Stephen Friedman should be investigated for $5.4 million in profits made through potential insider trading. His breach of fiduciary responsibility is shocking. The entire integrity of the Federal Reserve bank should be called into question. There is no place for the Fed as the primary regulator of the financial system given their penchance for secrecy and cronyism. They are a private company owned by the banks. The proposal to give them that responsibility is patently absurd.

Obama's administration of the financial system, cloaked in excessive secrecy, conflicts of interest, and enormous payoffs to campaign contributors demands a Congressional investigation, except of the course those doing the investigating are also implicated in the scandal.

An appointment of an independent prosecutor to investigate the Treasury bailouts is the decent thing for the Justice Department to do in any presidential adminstration, not to mention one that is a reform government that had promised transparency and an end to crony capitalism and lobbyists running the process.

Obama is a failure, and is in danger of becoming a disgrace. If the Democrats lose their significant majority in the Congress in the 2010 elections, we would expect a thorough investigation to be conducted.

New York Fed’s Secret Choice to Pay for Swaps Hits Taxpayers
By Richard Teitelbaum and Hugh Son

Oct. 27 (Bloomberg) -- 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.

Among AIG’s bank counterparties were New York-based Goldman Sachs Group Inc. and Merrill Lynch & Co., Paris-based Societe Generale SA and Frankfurt-based Deutsche Bank AG.

By Sept. 16, 2008, AIG, once the world’s largest insurer, was running out of cash, and the U.S. government stepped in with a rescue plan. The Federal Reserve Bank of New York, the regional Fed office with special responsibility for Wall Street, opened an $85 billion credit line for New York-based AIG. That bought it 77.9 percent of AIG and effective control of the insurer.

The government’s commitment to AIG through credit facilities and investments would eventually add up to $182.3 billion.

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.

Subprime Mortgages

CDOs are bundles of debt including subprime mortgages and corporate loans sold to investors by banks.

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.

The New York Fed’s decision to pay the banks in full cost AIG -- and thus American taxpayers -- at least $13 billion. That’s 40 percent of the $32.5 billion AIG paid to retire the swaps. Under the agreement, the government and its taxpayers became owners of the dubious CDOs, whose face value was $62 billion and for which AIG paid the market price of $29.6 billion. The CDOs were shunted into a Fed-run entity called Maiden Lane III.

Habayeb, who left AIG in May, did not return phone calls and an e-mail.

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. Friedman, 71, resigned in May, days after it was disclosed by the Wall Street Journal that he had bought more than 50,000 shares of Goldman Sachs stock following the takeover of AIG. He declined to comment for this article.

In his resignation letter, Friedman said his continued role as chairman had been mischaracterized as improper. Goldman Sachs spokesman Michael DuVally declined to comment.

AIG paid Societe General $16.5 billion, Deutsche Bank $8.5 billion and Merrill Lynch $6.2 billion.

New York Fed

The New York Fed, one of the 12 regional Reserve Banks that are part of the Federal Reserve System, is unique in that it implements monetary policy through the buying and selling of Treasury securities in the secondary market. It also supervises financial institutions in the New York region.

The New York Fed board, which normally consists of nine directors, in November 2008 included Jamie Dimon, chief executive officer of JPMorgan Chase & Co., and Friedman. The directors have no direct role in bank supervision. They’re responsible for advising on regional economic conditions and electing the bank president.

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.”

Citigroup Inc. agreed last year to accept about 60 cents on the dollar from New York-based bond insurer Ambac Financial Group Inc. to retire protection on a $1.4 billion CDO.

Unwinding Derivatives

In March 2009, congressional hearings and public demonstrations targeted AIG after it was disclosed it had paid $165 million in bonuses that month to the employees of AIGFP, which is unwinding billions of dollars in derivatives under the supervision of Gerry Pasciucco, a former Morgan Stanley managing director who joined AIG after the CDS payments were mandated.

Far more money was wasted in paying the banks for their swaps, says Donn Vickrey of financial research firm Gradient Analytics Inc. “In cases like this, the outcome is always along the lines of 50, 60 or 70 cents on the dollar,” Vickrey says.

A spokeswoman for Geithner, now secretary of the Treasury Department, declined to comment. Jack Gutt, a spokesman for the New York Fed, also had no comment.

One reason par was paid was because some counterparties insisted on being paid in full and the New York Fed did not want to negotiate separate deals, says a person close to the transaction. “Some of those banks needed 100 cents on the dollar or they risked failure,” Vickrey says.

A Range of Options

People familiar with the transaction say the New York Fed considered a range of options, including guaranteeing the banks’ CDOs. They say that by buying the securities, AIG got the best deal it could.

According to a quarterly New York Fed report on its holdings, the $29.6 billion in securities held by Maiden Lane III had declined in value by about $7 billion as of June 30.

Edward Grebeck, CEO of Stamford, Connecticut-based debt consulting firm Tempus Advisors, says the most serious breach by the government was to keep the process of approving the bank payments secret.

“It’s inexcusable,” says Grebeck, who teaches a course on CDSs at New York University. “Everybody should be privy to the negotiations that went on. We can’t have bailouts like this happening behind closed doors.”

Secret Deliberations

The deliberations of the New York Fed are not made public. In this case, even the identities of the AIG counterparties weren’t disclosed until March 2009, when U.S. Senator Christopher Dodd, head of the Senate Finance Committee, demanded they be made public.

Bloomberg News has filed a Freedom of Information Act request seeking copies of the term sheets related to AIG’s counterparty payments, along with e-mails and the logs of phone calls and meetings among Geithner, Friedman and other New York Fed and AIG officials. The request is pending.

The Federal Reserve has been reluctant to publish information on its efforts to stabilize the financial system since the crisis began. The Fed has loaned more than $2 trillion, yet it refuses to name the recipients of the loans, or cite the amount they borrowed, saying that doing so may set off a run by depositors and unsettle shareholders.

Bloomberg LP, the parent of Bloomberg News, sued in November 2008 under the Freedom of Information Act for disclosure of details about 11 Fed lending programs. In August, Manhattan Chief U.S. District Judge Loretta Preska ruled in Bloomberg’s favor, saying the central bank had to provide details of the loans.

The Fed has appealed to the Second Circuit Court of Appeals, and the data remain secret while the appeal proceeds.

‘Cataclysmic Financial Crisis’

Information on the borrowers is “central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression,” attorneys for Bloomberg said in the Nov. 7 suit.

Questions about the New York Fed transactions may be answered by Neil Barofsky, inspector general for the Troubled Asset Relief Program, or TARP. He is working on a report, which may be released next month, on whether AIG overpaid the banks. TARP is the vehicle through which the Treasury invested more than $200 billion in some 600 U.S. financial institutions.

William Poole, a former president of the Federal Reserve Bank of St. Louis, defends the New York Fed’s action. The financial system had suffered through months of crisis at the time, he says. The investment bank Bear Stearns Cos. had been swallowed by JPMorgan; mortgage packagers Fannie Mae and Freddie Mac had been taken over by the government; and the day before AIG was rescued, Lehman Brothers Holdings Inc. had filed for bankruptcy.

‘Enough Trouble’

“I think the Federal Reserve was trying to stop the spread of fear in the market,” Poole says. “The market was having enough trouble dealing with Lehman. If you add, on top of that, AIG paying off some fraction of its liabilities, a system which is already substantially frozen would freeze rock-solid.”

Still, officials at AIG object to the secrecy that surrounded the transactions. One top AIG executive who asked not to be identified says he was pressured by New York Fed officials not to file documents with the U.S. Securities and Exchange Commission that would divulge details.

“They’d tell us that they don’t think that this or that should be disclosed,” the executive says. “They’d say, ‘Don’t you think your counterparties will be concerned?’ It was much more about protecting the Fed.”

‘An Outrage’

Friedman’s role remains controversial. 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.

Jerry Jordan, former president of the Federal Reserve Bank of Cleveland, says Friedman should have resigned from the New York Fed as soon as it became clear that Goldman stood to benefit from its actions.

“It’s an outrage,” Jordan says. “He needed to either resign from the Fed board or from Goldman and proceed to sell his stock.”

98,600 Goldman Shares

Friedman remains a member of Goldman’s board and held a total of 98,600 shares of the firm’s stock as of Jan. 22.

Vickrey says that one reason the New York Fed should have insisted on discounted payments for AIG’s CDSs is that the banks likely had hedges against their insured CDOs or had already written down their value. 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.”

In any event, former St. Louis Fed President Poole says the entire process should have been public and transparent. “There should be a high bar against not disclosing,” Poole says. “The taxpayer has every right to understand in detail what happened.”

http://jessescrossroadscafe.blogspot.com/

NY Fed's Secret Choice to Pay for Swaps Hits Taxpayers - Bloomberg

http://www.bloomberg.com/apps/news?pid=206...id=a7T5HaOgYHpE

Tim Geithner should go to jail...

Rep. Edolphus Towns: AIG's Misguided TARP-Funded Bonuses
from The Huffington Post by Rep. Edolphus Towns

The American people were justifiably outraged when they learned earlier this year that American International Group (AIG) would pay $165 million in bonuses to executives at AIG's Financial Products Division (AIGFP), the very division that brought the company to its knees. The news came just months after taxpayer dollars funded an $85 billion bailout of AIG last September, followed by more money in October, more again in November and still more in March of this year. In total, the federal government committed $180 billion to save the insurance giant.

Not long after the last transfer of $85 million in TARP funds to this company, Federal Reserve officials learned that AIG planned to distribute a total of $1.75 billion in bonuses and other extraordinary compensation throughout the company.

Since that time, the American people have been eager to understand how the government failed to prevent these bonus payments from going out the door - payments that were paid out with their taxpayer dollars. The public also wants to know what their government is doing to prevent an episode like this from happening in the future.

Recently, I held a House Oversight and Government Reform Committee hearing to better understand why there was not diligent oversight of pay practices at AIG after the company received a multi-billion dollar government funded bailout. Our sole witness for the hearing was the government's TARP watchdog, Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP). The SIGTARP completed an audit this month that examined compensation practices at companies that received bailout money, including AIG, and his testimony provided us with an explanation of the findings of his report.

We first learned from the SIGTARP that AIG was not always a company that awarded its executives lavish bonuses. The SIGTARP's audit found that AIG's compensation used to be weighted toward long-term incentives that were payable only at retirement. In other words, they used the classic "golden handcuffs." But in 2007, when losses began to mount, AIG's new management decided to "update" their compensation plans. The golden handcuffs were replaced by golden envelopes. The era of instant gratification had arrived at AIG. In essence, long-term incentives were rejected in favor of risky, short-term gains.

We also learned from Mr. Barofsky's report that the Treasury Department, under former Treasury Secretary Henry Paulson, abdicated its responsibility to oversee the executive compensation plans at AIG. In fact, Treasury made no independent effort to evaluate the breadth of AIG's compensation obligations before funneling taxpayer dollars to the company. Not until March 19, 2009, when Secretary Geithner announced a plan to deal with future payments of executive compensation at AIG, did Treasury finally begin to oversee the company's compensation practices. Therefore, much of the public outcry this spring could have been avoided had Treasury evaluated the compensation packages at AIG from the moment former Secretary Paulson began allocating TARP funds.

Widespread outrage at this situation among taxpayers and policymakers has resulted in a number of actions designed by the Obama Administration to rein in executive compensation, particularly at firms receiving TARP funds. On June 10, 2009, the Treasury Department issued its Interim Final Rule on TARP Standards for Compensation and Corporate Governance. The most important part of the rule was the creation of the Office of the Special Master for TARP Executive Compensation. Treasury appointed Kenneth Feinberg as Special Master, who is serving pro bono.

Mr. Feinberg already has his hands full. According to the SIGTARP, AIG executives still believe that $200 million dollars in bonuses - or so-called retention payments - should be paid to them without regard to the company's performance and without repaying the government in full. News reports indicate that Mr. Feinberg is having trouble convincing AIG to reduce those payments. This does not surprise me.

I look forward to hearing directly from Mr. Feinberg tomorrow, Wednesday, October 28th, when he will testify before our Committee about his review of executive compensation at TARP recipient companies, including his decision last week to slash compensation for the top 25 executives at the seven largest bailout companies (AIG, Bank of America, Citigroup, Chrysler, Chrysler Financial, General Motors and GMAC) that have not repaid the taxpayers.
More on Financial Crisis

http://www.huffingtonpost.com/chairman-ed-...e_b_335655.html

Tavakoli on AIG Swaps: "There’s No Way They Should Have Paid at Par. AIG Was Basically Bankrupt", and Goldman Sachs CFO Lied About AIG
from Washington's Blog by George Washington


Derivatives expert Janet Tavakoli made the following comments by email about the Bloomberg article "New York Fed’s Secret Choice to Pay for Swaps Hits Taxpayers":

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

I agree.

By way of contrast, Tavakoli points out that:

Citigroup Inc. agreed last year to accept about 60 cents on the dollar from New York-based bond insurer Ambac Financial Group Inc. to retire protection on a $1.4 billion CDO.

Tavakoli also says that Goldman Sachs CFO David Viniar lied about AIG:

It is a strong statement to say that a CFO lied to the public, and in my opinion, David Viniar, Goldman Sach’s CFO lied about Goldman’s exposure to AIG while the AIG bailout was in progress in September 2008. Viniar spoke about risk management, but that is a separate issue from whether or not Goldman Sachs would have money at risk due to its direct business with AIG. Goldman Sachs would have been out billions of dollars in collateral had a bankruptcy-like settlement been negotiated with AIG, and that is material.
This is what David Viniar said during his Sept 16, 2008 investor conference call:

David Viniar - The Goldman Sachs Group, Inc. - EVP, CFO Sure. Without giving exact numbers, let me just tell you how we think about this. AIG and Lehman, big important financial institution counterparties to Goldman Sachs. We did and we do a lot of business with both of them, as we do with all other major financial institutions. The way we do business with financial institutions is by having appropriate daily margin terms. That is how we are able to do the volume of business with each other that we do. And that goes for AIG, Lehman, and also Morgan Stanley, and JPMorgan, and Citi, and UBS, and Credit Suisse. That is how we manage our risk. In addition to the margin terms, we augment our risk management with appropriate hedging strategies. You heard at the beginning of my remarks that we believe one of the biggest challenges we have is to avoid large concentrated exposures; and we took that very much into account in managing our credit exposures to Lehman and to AIG, as well as we do with any other financial institution. Given that, what I would tell you is given the outcome at Lehman and whatever the outcome at AIG, I would expect the direct impact of our credit exposure to both of them to be immaterial to our results.

http://georgewashington2.blogspot.com/2009...res-no-way.html