The Never-Ending Goldman-AIG Saga
Suspicions of malfeasance without much evidence.
By HOLMAN W. JENKINS, JR.
JANUARY 26, 2010, 9:49 P.M. ET.
Even among those who usually find themselves in agreement, much screaming and fighting has centered on Goldman and the AIG bailout. The controversy will be the subject of yet another potentially inflamed congressional hearing today. At issue is whether the New York Fed (proprietor, Tim Geithner) engaged in shameful and scurrilous activity in OK'ing terms that fully covered Goldman Sachs and other counterparties on certain AIG commitments to cover losses on mortgage-related derivatives.
Let us attempt to clear the air with some role-playing. Let's say you are Mr. Geithner. Across the table sits one of the counterparties, a group whose number includes French, German, British and U.S. banks. Let's say in this case it's a representative of Goldman, stylishly turned out in red velvet, with horns and pitchfork.
Mr. Geithner: The U.S. government is rescuing AIG and would like you to accept a discount of 40% in return for the taxpayer settling AIG's outstanding obligations to you.
Goldman: Fine. Just give me a reason why I should accept. I am happy to comply, but this is a negotiation, so you must tell me what's in it for me.
Mr. Geithner could give a couple of answers, either of which would likely bring Goldman into compliance with the Fed's wishes. He could say: Because if you don't agree, we will let AIG go belly-up and you will get even less, especially in a general collapse of the financial system. The only problem here is that the U.S. government has intervened precisely because it has decided an AIG bankruptcy is unacceptable given the fragility of market sentiment and fears of a wholesale run on the nation's banking system. It would have been contrary to the government's entire purpose at the time to breathe to anyone in the market that AIG might be allowed to collapse.
Or Mr. Geithner could say: I am your regulator and soon-to-be Treasury secretary in the Obama administration, and things will not go well for you in the future unless you agree to my demands.
Reading between the lines of various investigations, Mr. Geithner eschewed this approach because he deemed it "improper." Perhaps also because Goldman would have said: Fine, but give it to me in writing. I'm surrendering billions in claims on a promise that I will be subject to political and regulatory favoritism in the future, and I want a letter that I can wave to remind you of that promise.
Mr. Geithner knows of course that he cannot control what his successors or the administration or Congress will do in the future. Even if Goldman were inclined to accept a verbal assurance, worse than any fallout from paying Goldman 100 cents on the dollar would be the political fallout when Goldman made public that such assurances were given.
Faced with these options, the New York Fed appears to have dropped the matter of haircuts rather quickly and moved on, which now leads to unflattering insinuations. Many also no doubt will say that Goldman and others should have saluted and accepted the proposed haircuts simply because they were asked to. Perhaps Goldman (but not the others) wishes now it had done so given the trouble the issue has caused the firm.
But let us remember these events were compressed into an extraordinarily hectic period in late 2008. Goldman was not in a position to know that haircuts were a DefCon issue unless the Fed and Treasury took the trouble to communicate as much—and it appears that, with a zillion other things on policy makers' agenda, such a meeting of minds did not crystallize, perhaps because all involved had more important things to worry about.
Yes, subsequent evidence suggests the New York Fed did come to consider the subject embarrassing, since it tried to discourage AIG from disclosing the exact terms of the counterparty payments. This has infused an air of malfeasance into the matter and probably sooner or later will cost Mr. Geithner his job. But what should really be regretted is that policy makers at the time did not have the bureaucratic daring to treat the offending AIG affiliate, known as AIGFP, the way they did Citigroup or J.P. Morgan, simply extending a taxpayer guarantee to the questionable assets.
In all likelihood, taxpayers would not have lost a dime on the AIG bailout—they would have earned millions in fees for a guarantee that never would be invoked. AIG would be a thriving global insurer today, albeit one with a manageable exposure when and if the underlying mortgage securities defaulted. There'd be no giant cash payments to Goldman for anyone to be scandalized about.
A lot of considerations got pushed aside in the rush to rescue AIG, which we still suspect was done for the legitimate reasons offered by Mr. Geithner, Ben Bernanke and Hank Paulson—to stave off a financial crisis. But rushed work is sloppy work, and that certainly applies in this case. |
