Tim Geithner "Protects America From Itself" By Forcing Elimination Of Material AIG Disclosure

Tyler Durden's picture

The story of the day once again focuses on the (lack of) actions of Treasury Secretary Tim Geithner, who according to recent revelations courtesy of Darrell Issa, did all he could to prevent material disclosure at AIG indicating the sad shape of the company in a filing released on Christmas Eve in 2008. The kicker can be seen on the crossed out section in the attached memorandum, where Geithner made it clear that he was willing to withhold materially public information vis-a-vis the bailout of AIG counterparties at 100 cents on the dollar, that only became public months later after intense political inquiry. The whole part discussing this in the December 24, 2008 SEC filing was eliminated under Geithner's instructions:

As a result of this transaction, the AIGFP counterparties received 100 percent of the par value of the Multi-Sector CDOs sold and the related CDS have been terminated. ML III has now acquired approximately $[62.1] billion in par amount of Multi-Sector CDOs and has aggregate liabilities resulting from its borrowings from the NY fed of approximately $[___] billion.

We aren't sure, SEC, but in our opinion this consitutes a pretty dramatic and forced lack of public disclosure for what was still a public company? And if that wasn't enough, the following guidance from Mr. Geithner should be sufficient for Judge Rakoff to immediately add Mr. Geithner to the list of people who will soon have their fate determined by a jury of their peers. Because while the SEC has proven beyond a reasonable doubt it does not care for proper disclosure of information any more, Mr. Geithner's admonition is simply staggering:

"Note that there should be no discussion or suggestion that AIG and the NY Fed are working to structure anything else at this point."

How ironic this blatant obfuscation would eventually turn out to be...

Yet one of the very relevant pieces of information is also contained in what was previously undisclosed:

On December 17, 2008, AIGFP entered into Amendment No. 1 to the Shortfall Agreement, dated November 25, 2008, with Maiden Lane III LLC in connection with ML III's purchase, on December 18, 2008 of $[  ] billion in par amount of additional multi-sector collateralized debt obligations, including $[   ] billion of Multi-Sector CDOs previously held by AIGFP as a result of exercise of 2a-7 Puts.

Ah, the mythical 2a-7 "puts." Let's recall a little blurb from AIG's Q2 2008 conference call, where Citadel's Dan Johnson' leads the following exchange:


Next question comes from Dan Johnson, Citadel Investments. Your line is open.

Daniel Johnson - Citadel Investments

thank you very much. Would you folks mind giving us a little bit more
of a tutorial around the issues referred to as 2a-7 Puts I believe its
on page 87, of the Q,
just basically trying to understand how many more
I guess clients could put this business back to you that would cause
you to generate more CDOs as we did in the second quarter?

Elias Habayeb - Chief Financial Officer AIG Financial Services

it's Elias Habayeb. With respect to the 2a-7 at this point we have
written all the 2a-7s we're committed to write. So that's the maximum
amount of 2a-7 Puts that we have outstanding. The way those work is
that that if there is a failed remarketing then we would have potential
obligation to buy the CDO back and/or the underlying security back and
on most of them we do have backstop liquidity lines in the event those
bonds have been put back to us.

Daniel Johnson - Citadel Investments

is it that we don't have any more exposure to this because there is
been no failed remarketings or even that whole issue is basically there
are no more 2a-7 that we would be on, potentially on a risk for?

Elias Habayeb - Chief Financial Officer AIG Financial Services

we do have outstanding 2a-7 Puts that continue to be outstanding and
given the current state of the market we would be expecting to be
buying back those underlying referenced obligations.

Daniel Johnson - Citadel Investments

And if sometime now what that means from capital consumption?

Elias Habayeb - Chief Financial Officer AIG Financial Services

Not at this point.

Our legal experts is looking evaluating whether or not this disclosure by then AIGFP CFO Elias Habayeb may constitute 10(b)-5 fraud. In either case, we will present a much broader analysis of 2a-7 puts due to their close connection to a topic near and dear to us and our readers: money markets, which all fall under the purview of Rule 2a-7. We are midly curious why AIGFP had material exposure to money market portfolio enhancing arrangements:

Rule 2a-7 currently characterizes certain features that enhance the credit or liquidity of portfolio  securities as "puts" and "unconditional puts."<(10)>  To clarify terminology used in rule 2a-7, the Commission proposed to replace these terms with a new term -- "guarantee" -- that would include a wide-range of arrangements designed to unconditionally support the credit of the issuer of a security...Since 1986, rule 2a-7 has permitted a fund to rely exclusively on the credit quality of the issuer of an "unconditional demand feature" in determining whether a security meets the rule's credit quality standards.<(13)>  The 1996 Amendments also permitted a fund to exclude from the rule's issuer diversification standards a security subject to an unconditional demand feature provided by a person that does not control, or is not controlled by or under common control with, the issuer of the security ("non-controlled person").<(14)>

We are also very curious why 2a-7 puts were the proximal cause for billions in multi-sector CDO exercises. Lastly, we are extremely curious at how many other entities (aside from AIG) 2a-7 puts may play a comparable destructive and destabilizing influence at the nexus of structured finance and money markets.

In the meantime, here is the full letter, courtesy of Bloomberg, that should make any ambivalence in calls for Tim Geithner's immediate resignation moot.

and this one:

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bugs_'s picture

Are all my non-disclosures so small?

crosey's picture

Staggering (again).

How long can this chicanery go on, unresolved?  Until the 2010 elections?  Until it all crashes?

Will we reinstate public executions?

xamax's picture

It can continue like that a long time. Dont forget 99.8% of the poulation dont even have a clue about what we are talking here. So they can lie, hide at infinity.Of course it will crash one day, and then ? there will be probably something à la 2nd WW and the game starts from 0.   

Anonymous's picture

More to the point: most people do not care. This sort of stuff requires reading comprehension and stuff.

For the masses: as long as they can continue to watch the box and the loan to buy the latest gadgets and fashions are still forthcoming, they're happy.

El Hosel's picture

I sent two emails to CNBC this morning to bring this story to their attention,  ( as if they don't know about it ) . Looks like the "#1 in business news" has no interest in this one...Suprise. 

xamax's picture

CNBCOMCASTAGANDA is certainly not the right adress......

I'd try another channel (Fox,CNN). But I think chances are small, even in Europe noone wants to burn his fingers....(especially the mainstream media)

Damn Yankee's picture

@ crosey,

The answers to your questions are: (1) see question 3; (2) nope, longer; (3) yes; and (4) hell yes!

In other words, you point is well taken

bonddude's picture


albion402's picture

seems like a good running start for opening a room at the gray bar manor....

Stoploss's picture

Off with his head!!

Daedal's picture

It's official: The rabbit hole is a bottomless pit.


Sancho Ponzi's picture

Say 'bye bye' to tiny text Timmy.

Handle with care's picture

Why aren't there a pack of feral lawyers smothering AIG and the government in lawsuits on behalf of shareholders and those who went short?

Shameful's picture

Lawyers like to take cases they can win.  And with the business judgment rule and a lot of the other chicanery it's actually quite hard to get people on stuff other then total fraud.  In this case the Gov was involved so you could even argue it's not fraud because Uncle Sugar told me to do it.  Also remember that litigation is a gamble and takes money.  this kind of suit would take a massive wad of cash and you might not get paid for it so a big gamble.  Hell remember that the Exxon Valdez case is still in litigation, and we know that exxon was at fault and even had a judgement against them :)  Thats to AIG. 

As to the gov the gov can just not let you sue them.  Remember when you sue they gov they have to let you sue them, they can claim sovereign immunity and tell you to kiss off.

Anonymous's picture

The business judgment rule applies to suits for breach of the duty of care (but not suits for breach of the duty of loyalty).

Securities fraud (Rule 10b-5) is not subject to the business judgment rule.

m.g. turner's picture

when they've finished playing Masters of the Universe (se non prima) they, all of them, must be held accountable.....but who will hold them accountable in our lawless universe?

Handle with care's picture

If the American people don't rise up and remind their rulers that they rule at the pleasure of the people, then the American people will deserve the neofeudalism that is being put in place for them

Let them all fail's picture

And exactly what are you doing to remind them?  Rising up?  Sitting at a computer?  Or do you deserve neofeudalism?  What do you suggest, or is this a pointless post?

Anonymous's picture

They may be a bunch of nut-case Texas Libertarians but GOOOH (google it) is trying to do something other than kvetch in "comments" posts.

Herd Redirection Committee's picture

Totally in the same boat.

I try to tell people about America's problems all the time, and that we are going down a similar path.

Well then why is there nothing on the news about America's imminent downfall,  I am often asked...

I try to warn people that America is a power in decline but so what, what are people supposed to do about it? If even the people  IN AMERICA are too lazy to do something about it,  why should we concern ourselves with trying to help them?

mule65's picture

Phew, nasty selloff this morning.  Glad that's over.  Up, up and away!

El Hosel's picture

The working group "maintaining an orderly market",  in support of their man.

WaterWings's picture

I don't understand how you folks that do this for a living actually maintain your sanity. Methinks you are part of the problem we face because any ordinary citizen feels like this:

Every normal man must be tempted at times to spit on his hands, hoist the black flag, and begin to slit throats.
H. L. Mencken
US editor (1880 - 1956)

Back and forth, day after day. Suspended animation, then the lights go out. See you tomorrow, Tim.

Herd Redirection Committee's picture

Nobody ever went broke underestimating the intelligence of the American public.

H. L. Mencken

Anonymous's picture

People get the government they deserve. Good jorb, Obamabots.

Anonymous's picture

c'mon. Enough already.

No amount of "I told you so" is going to make Barack Obama any more responsible for your problems.

Uncle Remus's picture

Perhaps not, but if it makes the bastards that voted for the sock puppet squirm a little in their own steaming pile of gullibility, then let's sing again, with some real fcuking gusto this time.

Cretinous leeches.

Heavy's picture

They were all sock puppets, (excepting Ron Paul, perhaps, I did register to vote for him in the primary) so is passively participating in the flawed voting system wrong?  Even to vote for Ronny?  Maybe it's only wrong to vote for the ones who might be treasonous (does economic war waged against the common American fall under the constitution's definition of treason? (not to mention foreign economic destruction caused by our post WWII systems, which wouldn't be within the definition of treason mentioned unless liberally expanded definitions are used to explain the explanation)))  As for "what to do?" I'll settle for some more published populist rage for the moment...the doing will happen soon enough, and we'll all wish for something else when it does, then, however, maybe something good will be done with regard to our governance.  History books of the future (yes, if we can still read, ha ha ha...cliche) will thrive on the dramatic changes of these days.  And maybe they'll be meant to convey truth if we do things correctly.  "Beginnings are such delicate times" and all that sort of sentiment.

Anonymous's picture

What about Friedman at the NY Fed. He was buying GS shares with this undisclosed information. Isn't anything going to be done about this? or is it ok for Fed officials to trade on inside information?

john_connor's picture

They are just setting up Geithner for his fall to give O political cover.  He will simply be replaced by another loyal insider to the industry.


Nothing to see here.

deadhead's picture


Everything will be unloaded on Geithner, that was clear several months ago.  Now the rest of the goodies are coming out.

Anonymous's picture

Flashback to November, with Krugman and DeLong signalling their support for Plan Geithner: http://www.zerohedge.com/article/frontrunning-november-18-0#comment-137550 . (Note that at the same time DeLong was flying the blame-Geithner kite for Krugman, he was also road-testing the "maybe there is a small chance of a double-dip after all" message which Krugman has now taken up.)

DoChenRollingBearing's picture

Maybe it will be Chris Dodd as new TreaSec.

Anonymous's picture

Ahh, now I remember. TTT is the only one for the job, because he is the only one that really understands all of the details. OK. I agree.


January 21, 2009

11:52 a.m. | Credit default swaps: No one is going to tell Mr. Geithner that he overlooked the dangers of credit default swaps. Responding to a senator’s question, he says he “absolutely did not miss” the potential problems presented by this huge and unregulated part of the derivatives market, calling it his “life’s work.” Credit default swaps amplified the effects of the recent financial crisis and were a major reason the government stepped in to bail out the American International Group.


waterdog's picture

Looks like Leo was right. I just hope he is wrong about who will replace Geithner.


Anonymous's picture

Resign?.He accomplished what he was brought for. And I believe he is now despensible. As to next job???

Joe Sixpack's picture

Sr. CDS analyst at Goldman Sachs?

Anonymous's picture

Someone need to bring this to Dylan Ratigan's attention, may be he would bring it up on TV.

jbc77's picture

It's become comedy. Problem is, 95% of Americans are walking around as living zombies mesmerized bu tout TV and Brittany Spears. It's going to take something large scale, who knows, maybe another market meltdown before the zombies will flinch. Got to hurt their pockets to awaken them, get pitchforks in their hands.

The entire Obama adminsitration is a kin to a really bad reality show.


lizzy36's picture

Given that America seems to have an infinite supply of both k-y and cottonelle dollar paper, the only consequence resulting from these revelations will be Tiny Tim falling on his sword.  Absolutely nothing else will change (except i will start pvring JD's appearances on the hill).

Nice story, too bad 99% of the American population either doesn't understand it, or doesn't give a shit. 

Daedal's picture

Given that America seems to have an infinite supply of both k-y and cottonelle dollar paper, the only consequence resulting from these revelations will be Tiny Tim falling on his sword.

Considering the increasing price of crude, I may no longer be able to afford k-y to help lubricate myself from these daily rapings.

Joe Sixpack's picture

Try a natural product: RAPEseed oil.

Anonymous's picture

The Forgotten (middle class) Man (and Woman) is delving away in patient industry, supporting his family, paying his taxes (will be paying a lot more in 2010 onwards), (conscientiously contributing to his 401k), casting his vote, supporting the church and the school, reading his newspaper, and cheering for the politician of his admiration, but he is the only one for whom there is no provision in the great scramble and the big divide.
- William Sumner prefacing Anatomy of a Bubble from 1930 prior to the Great Depression (How fitting to 2010 indeed!!)

Bracketed terms apply more to 2010 than to 1930 but the dynamics stay the same !!

Anonymous's picture

Is it allowed to conscientiously contribute to my 401k if it's invested in bullion, mining companies, and energy equities? Is it okay to see the writing on the wall and still sock money away?