Comments On SIGTARP's Testimony Ahead Of Tomorrow Congressional Hearing
As we read the just released testimony by SIGTARP Neil Barofsky ahead of tomorrow's Congressional hearing to examine "AIG's Federal Financial Assistance", we can't help but wonder about the blatant contradiction between what the FRBNY, and White House, has claimed regarding Tim Geithner's lack of involvement in the AIG email cover-up, and the following testimony:
On November 7th, 2008, FRBNY employees involved with the negotiations reported to then-FRBNY President Geithner on the efforts to convince AIG counterparties to accept haircuts on their claims against AIG in return for unwinding the CDS contracts. Noting both the willingness of UBS to negotiate a small haircut and the generally negative reactions from the other counterparties, these FRBNY officials recommended that FRBNY cease negotiations and proceed with paying the counterparties the market value of their underlying CDOs and permitting them to keep the collateral already posted, effectively paying them par for securities that collectively had a market value, based on the amount of the collateral payments, of approximately 48 cents on the dollar. According to these FRBNY executives, then-President Geithner “acquiesced” to the executive’s proposal. When asked by SIGTARP if the executives felt they had received their “marching orders” from then-FRBNY President Geithner to pay the counterparties par, one FRBNY official responded “yes, absolutely.”
So let's get this straight: Geithner is the decision maker on virtually all aspect of the AIG bailout, yet it is Sarah Dahlgren who is the party responsible for designing the ploy to cover up details about AIG's situation for as long as possible. That would make sense, except we should also have information as to who it is that Ms. Dahlgren reported to in the time between Geithner's issuance of "marching orders" and the December email fiasco that he had presumably recused himself. Was the New York Fed basically running on autopilot with the only one in charge being yet another tentacle of Goldman Sachs?
Here is some more disclosure on the decision to pay par: it appears it reaches to the very top.
The decision to pay effective par value was then brought before the Board of Directors of the FRBNY and the Board of Governors of the Federal Reserve. Each body gave its approval. According to the General Counsel for FRBNY, officials from Treasury were not involved in the negotiations of concessions with AIG’s credit default swap counterparties. The Chief Compliance Officer for Treasury’s Office of Financial Stability at the time also told SIGTARP that Treasury was not involved with the Maiden Lane III transaction and, when asked about who at Treasury SIGTARP should speak with regarding the transactions, he responded that Secretary Geithner was the appropriate official.
Also, specifically as pertains to the just posted piece on whether the AIG-rescue was a "backdoor bailout" of AIG's counterparties, Barofsky says this:
Questions have been raised as to whether the Federal Reserve intentionally structured the AIG counterparty payments to benefit AIG’s counterparties — in other words that the AIG assistance was in effect a “backdoor bailout” of AIG’s counterparties. Then-FRBNY President Geithner and FRBNY’s general counsel deny that this was a relevant consideration for the AIG transactions. Irrespective of their stated intent, however, there is no question that the effect of FRBNY’s decisions — indeed, the very design of the federal assistance to AIG — was that tens of billions of dollars of Government money was funneled inexorably and directly to AIG’s counterparties...The intent in creating Maiden Lane III may similarly have been the improvement of AIG’s liquidity position to avoid further rating agency downgrades, but the direct effect was further payments of nearly $30 billion to AIG counterparties, albeit in return for assets of the same market value. Stated another way, by providing AIG with the capital to make these payments, Federal Reserve officials provided AIG’s counterparties with tens of billions of dollars they likely would have not otherwise received had AIG gone into bankruptcy.
Lastly, the SIGTARP once again pounds home the case that the Federal Reserve's claims of a need for secrecy (let alone the bullshit claim that it should be commended and not disbanded for handing tens of billions of taxpayer money to Goldman) is nothing but yet more groundless hyperbole:
The now familiar argument from Government officials about the dire consequences of basic transparency, as advocated by the Federal Reserve in connection with Maiden Lane III, once again simply does not withstand scrutiny. Federal Reserve officials initially refused to disclose the identities of the counterparties or the details of the payments, warning that disclosure of the names would undermine AIG’s stability, the privacy and business interests of the counterparties, and the stability of the markets. After public and Congressional pressure, AIG disclosed the identities. Notwithstanding the Federal Reserve’s warnings, the sky did not fall; there is no indication that AIG’s disclosure undermined the stability of AIG or the market or damaged legitimate interests of the counterparties. The lesson that should be learned — one that has been made apparent time after time in the Government’s response to the financial crisis — is 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.
The first relates to public statements recently made by Treasury about the AIG transactions. For example, on January 7, 2010, in response to press inquiries regarding the role of Secretary Geithner in the decisions concerning AIG, a Treasury spokesperson stated the following via email to reporters:
"In the transaction at the heart of this dispute (Maiden Lane III's purchase of CDO's), the FRBNY made a loan of $25 billion which is on track to be paid back in full with interest so that taxpayers will be made whole. Somehow that fact that the government's loan is "above water" gets lost in all the consternation despite its mention on page 2 of the SIG-TARP report and weekly updates on the FRBNY's web site. (Emphasis added.)"
This statement simply does not advance the cause of transparency. As noted in the audit, it is clear that all of the infusions to AIG are linked: more than half the total amounts paid to counterparties in connection with the swap portfolio retired through Maiden Lane III did not come about through the Maiden Lane III purchases, but rather from AIG’s earlier collateral postings that were made possible in part by the original $85 billion FRBNY loan; that loan, in turn, was paid down with $40 billion of TARP funds. Treasury’s own TARP financial statement estimates that Treasury will not be made whole, but is rather projected to lose more than $30 billion on its AIG investments. Again, the various AIG infusions are directly linked: (a) the counterparties terminated their credit default swap agreements with AIG after they were both paid the fair market value of the underlying assets through Maiden Lane III and permitted to keep the collateral payments made by AIG; (b) many of those collateral payments were only made possible by the FRBNY loan; and (c) that loan was paid back in part by the initial $40 billion TARP investment. Narrowly asserting that taxpayers will be “made whole” on Maiden Lane III — just one part of the AIG counterparty transactions — without mentioning the huge losses Treasury expects to suffer on other, inextricably linked parts of the very same transactions is simply unacceptable; the American people deserve better.
Sigtarp goes on to discuss the just launched investigation into AIG:
The second issue relates to a series of documents that have recently been disclosed — as the direct result of the tenacity of the members of this Committee — about the Maiden Lane III transactions. As has been widely reported, these newly disclosed documents, among other things, relate to discussions about the public disclosure by AIG of the Maiden Lane III transactions in filings with the Securities and Exchange Commission. In light of these documents, we have initiated an investigation into whether there was any misconduct relating to the disclosure or lack thereof concerning the Maiden Lane III transactions.
Third, additional documents and facts have come to light that have caused SIGTARP to initiate an investigation to review the extent of the Federal Reserve’s cooperation with SIGTARP during the course of the audit. For example, in connection with the recent document productions to this Committee, documents have come to light that were not provided to the SIGTARP audit team during the course of the audit. FRBNY’s outside counsel has told SIGTARP that FRBNY will cooperate fully with SIGTARP’s investigation.
We will provide some more information on the quest to extract concessions shortly courtesy of the just declassified Blackrock report which we are currently scouring and will present for public consumption very shortly. Some of the discoveries there appear to refute the claims in another testimony to be presented tomorrow, this time by then-AIGFP CFO Elias Habayeb. We will post our findings shortly.