The truly extraordinary disclosures were that Paulson, Bernanke, and Geithner all purported to have had no involvement in one of the most expensive decisions in history — the decision to pay 100 cents on the dollar to the least deserving of recipients (and who, if Geithner’s testimony were to be believed, did not need to receive that largess) — and the unprincipled and indefensible decision to try to get AIG to cover up that fact and the beneficiaries of that largess. Indeed, Bernanke testified that he entered into an oral recusal (such recusals have to be put in writing under Office of Government Ethics rules) that meant that at the most critical time in financial regulation in 80 years an “acting” official was left in charge of all regulatory decisions at the NY Fed. This is bizarre because he was one of the rare senior public officials that did not have a clear conflict of interest due to their Wall Street ties. Those senior officials, e.g., Paulson, that had clear conflicts of interest did not recuse themselves and Goldman Sachs was the biggest single recipient of what two Fed Members aptly labeled a “gift” from the taxpayers. Worse, the acting Fed President reported to the NY Fed Board and its Chair, Stephen Friedman (of Goldman), who purchased a large block of Goldman stock in December 2008.
(Rep. Issa has charged that this indicates he was trading on inside information that produced a large investment profit.) This was such an outrageous conflict of interest that other regional Fed banks were outraged. Worse, the Fed staff approved Friedman’s conflict of interest. Still worse, he did not inform the Fed of his large purchase of Goldman shares in December 2008 (just after it received $12.9 B from the taxpayers (via AIG)).
Note that (1) Friedman was a Class C “Public Interest” director for the NY Fed (“Hi, I’m from Government Sachs and I’m here to represent the public’s interest”), (2) that Baxter was his leading defender (yep, the same NY Fed General Counsel that pushed the AIG cover up), and (3) and that the WSJ story logically should have noted that Geithner had recused himself during November and December 2008 because that fact would have been relevant to their study and they obviously wrote the story on the basis of interviews with senior NY Fed staff — but it does not. That makes it even more dubious that Geithner recused himself and/or it means that the NY Fed officials were trying to avoid public knowledge of the recusal. Baxter, as NY Fed GC, should have been involved in the recusal and screening procedures (again, mandated by OGE rules, particularly for nominees requiring Senate confirmation.
Analytically, the key development was the failure of the Committee to point out that all of Geithner’s arguments about the financial catastrophe that was (purportedly) certain if AIG were to spin off its trading unit and place it in bankruptcy proved the opposite of his conclusion about leverage. Recall that Lehman had gone done and every big AIG counterparty was desperately seeking federal aid and regulatory forbearance. They knew that if they tried to collect on their CDS they would cause AIG to fail and that they would be risking (1) getting zero cents on the dollar on their CDS (or, at most, whatever grossly inadequate collateral AIG had pledged), (2) royally pissing off every developed nation in the world — at a time when they needed government bailouts, liquidity lines, and regulatory forbearance. In sum, the very facts Geithner stressed in his testimony provided the government with the ultimate in negotiating leverage, particularly if, as Geithner testified, none of the counterparties needed to collect on the AIG CDS to remain healthy — (personally, I find Geithner’s claim dubious). Stiglitz’ new book, Freefall, points out that other distressed sellers of CDS “protection” during this period negotiated settlements in which they paid 13 cents on the dollar.
It was downright humorous to see Geithner purport to be affronted that anyone might be concerned that Goldman, and Goldman alums drawing federal paychecks, might serve Goldman’s interests. As Liar’s Poker emphasized, there’s always a “fool” in the game. Thanks to Geithner, Bernanke, Friedman, and Paulson the U.S. taxpayer was that “fool” — and AIG was their tool. Actually, my favorite is their decision to use AIG to secretly bail out UBS. Switzerland is a rich nation, why should we pay to bail out transactions that were never federally insured. But it gets better. We bailed out UBS while we were prosecuting them for massive tax fraud involving exceptionally wealthy Americans that were seeking to evade some of the lowest marginal income tax rates in the developed world. So, in economic substance, U.S. taxpayers paid the “fine” that UBS purported to pay to end the prosecution and gave UBS roughly $4.25 billion extra as a lagniappe. (Oh, and the Swiss courts just decided to shaft us by refusing to comply with the disclosures of the identities of the U.S. tax cheats required under the settlement with UBS.) So, we are now the global “fool.”
It is inconceivable that Bernanke should be reappointed before his role, and the role of his agency, in the twin AIG scandals (the give away and the cover up) are investigated.