When he was president of the New York Federal Reserve, Treasury Secretary Tim Geithner secretly negotiated the deal forcing AIG to repay some Wall Street creditors every last penny they were owed — even as the insurer tottered on the edge of insolvency, a new report says.
Usually, when businesses are about to go under, they can wring big concessions from creditors — paying a fraction of outstanding liabilities. Some creditors get nothing.
But according to a show-stopping story from Bloomberg, last November Geithner pushed aside an AIG executive to personally negotiate termination of $62 billion in complex derivative contracts with Goldman Sachs, Merrill Lynch, and other Wall Street creditors. The AIG executive reportedly was trying to extract big concessions — as much as 40 cents on the dollar.
Perhaps Geithner thought the payments would give him a discreet way to supply taxpayer dollars to firms that were struggling to stave off a Lehman-like end. Arguably, he may have been trying to prevent more panic in a panic-ridden market. In any event, according to Bloomberg. Geithner agreed to pay the firms 100 cents on the dollar for pesky contracts — credit-default swaps — that insured all kinds of toxic waste now sitting in a Fed-run portfolio.
Bloomberg says the decision cost US taxpayers $13 billion.
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.
But William Poole, a former St. Louis Federal Reserve Bank president, defends the payments:
“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.”
The story continues:
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.”
Bloomberg is in the middle of pursuing a Freedom of Information Act filing to get the Fed to disclose its Operation Bailout activities. The story of what happened during the terrifying days of September and October is still unfolding. Andrew Ross Sorkin’s new hot-selling book Too Big to Fail reveals that despite many protestations otherwise, Goldman Sachs and Morgan Stanley were battling the same forces that brought down Lehman Brothers. As details emerge, taxpayers will learn whether Geithner got fleeced by more experienced negotiators or if he erred on the side of prudence in an effort to prevent the total collapse of Wall Street. One thing is clear: No one in the Fed or Treasury thought to make the hand-outs from AIG conditional on some kind of meaningful payback to taxpayers.