I received an advance copy of the Special Inspector General for Tarp's Report called "Factors Affecting Efforts to Limit Payments to AIG Counterparties", which will be released tomorrow (posted below).
The report reveals that at least one counterparty indicated that it was willing to take a reduced payout on its credit default swaps. In other words, then-head of the Federal Reserve Bank of New York - Tim Geithner - wouldn't have had to even play hardball to get a concession from the counterparty.
But Geithner ended up dictating that all of AIG's counterparties get full payment - with no haircuts for anyone (except the American taxpayer).
The report includes these gems:
- As a policy matter, FRBNY was unwilling to use its leverage as the regulator for several of the counterparties to compel concessions, in part because in the negotiations it was acting as a creditor of AIG and not as the counterparties' primary regulator.
- Also as a policy matter, FRBNY was uncomfortable with violating the principle of sanctity of contract.
Well sure, that makes sense. A creditor doesn't want to negotiate hard and demand concessions from its debtor, now does it?
Apparently, while Geithner was concerned with the sanctity of the CDS contracts (which - I would argue - were all based on fraudulent representations concerning how safe an investment they were), he didn't care very much about the sanctity of the agreement of a government to do what is best for its people.
But actually, the New York Fed isn't a government agency. The Fed itself maintains that:
While the Fed’s Washington-based Board of Governors is a federal agency subject to the Freedom of Information Act and other government rules, the New York Fed and other regional banks maintain they are separate institutions, owned by their member banks, and not subject to federal restrictions.
So really Geithner - as head of the private bank-owned and managed New York Fed - was simply serving his constituency: the giant New York money center banks. Geithner's constituency never was the American public.
The giant banks were the creditors of the giant banks. Like two sock puppets putting on a big show of good cop / bad cop, the New York Fed pretended that it was negotiating hard, but ended up making sure that the boys got their full cut.