The revised version of the story sidesteps questions about whether the bailout of A.I.G. -- arranged by Mr. Geithner -- was influenced by the specific needs of some of the insurer's counterparties, like Goldman Sachs.
The Times's Gretchen Morgenson reported that Lloyd Blankfein, the chief executive of Goldman, was the only Wall Street executive at a meeting at the New York Federal Reserve on Sept. 15 to discuss the A.I.G. bailout. A Goldman spokesman said Mr. Blankfein was not there to represent his firm's interests, but rather that Goldman "engaged" the issue because of the implications to the entire system.
Adding to the opacity, the Fed recently decided to keep confidential one of two reports that it made to Congress on the A.I.G. bailout. If the Fed had not insisted on confidentiality, that report would have been made public.
Mr. Geithner should be asked at his confirmation hearing to explain which firms were threatened by an A.I.G. collapse, in what amounts and how those entanglements justify an ongoing bailout. Mr. Geithner must also explain how such entanglements came to be the norm on his watch. His answers will help shed light on whether he is sufficiently distant from Wall Street to reform a system that has proved catastrophically unstable.
The bit about the confidential report is a classic bit of misdirection: While it's understandable that the press is upset that the report is confidential (I'd like to see it too), there is zero chance that it contains some kind of smoking gun saying that the AIG (NYSE:AIG) bailout was really a Goldman Sachs bailout. The reason for the confidentiality is much more mundane: the report contains commercially sensitive details of AIG's positions, which would be picked over by the rest of Wall Street were they to be made public.
I do think that Geithner should be asked about the firms threatened by an AIG collapse, however, and I do think that he should reply in detail. Yes, Goldman Sachs was a big AIG counterparty, but it has stated repeatedly -- and credibly -- that its AIG exposure was hedged.
But Goldman is a trading shop, with risk managers who hedge anything they can measure on a real-time basis. The real damage of an AIG collapse would not have been at trading shops but rather larger, slower, commercial banks which had large CDO portfolios and less-assiduous risk-management systems.
The lion's share of AIG's losses have come from the credit default swaps that it wrote on banks' CDOs. If those swaps were to become worthless -- or even just worth less -- then any counterparties who hadn't hedged their AIG exposure would have to have taken enormous further write-downs on CDO holdings they thought they'd hedged.
My gut feeling is that if AIG had failed, there's a good chance that Citigroup (NYSE:C) would have become insolvent overnight. And since Citi is far too big to fail, it was much easier for the Fed to bail out AIG than it would have been for the Fed to bail out Citi and some unknown number of other banks who had also hedged their CDO positions with AIG.
Of course, none of this would have been good for Goldman Sachs -- the insolvency and/or bailout of one or more major banks would have had collateral damage on Goldman just like it did on the rest of the financial system and the economy as a whole. And there's a good chance that Goldman's AIG hedges would turn out to have been with counterparties who were themselves exposed to AIG, and therefore not worth as much as Goldman had thought.
But there's no real evidence supporting the NYT's implication that Tim Geithner bailed out AIG because he wanted to do a special favor for Lloyd Blankfein. I do hope that he can put this meme to rest at his confirmation hearings, if not before.