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Geithner and AIG are again in the news. Details on what happened are presented in this article.

1. Late summer 2008 – global market for asset backed securities drying up, big banks reluctant to lend to each other – The Global Credit Freeze Starts

2. A semi-autonomous AIG unit based in London had guaranteed a large amount of asset-backed securities (see Morgenson report). It was a very profitable business: it amounted to more than 17% of AIG’s operating income in 2005. But as the asset backed security market collapsed in the fall of 2008, claims poured into AIG.

3. In mid-September 2008, Treasury Secretary Paulson, Geithner, then head of the Federal Reserve Bank of New York (FRBNY) met with senior executives of AIG and the Bank’s headquarters in New York. The only outsider in that meeting was Lloyd Blankfein who replaced Paulson as CEO of Goldman Sachs.

4. As I reported, Goldman had a large stake in AIG’s survival: an insurance claim for guaranteed asset-backed securities of almost $13 billion.

5. That meeting resulted in an $85 billion credit line from the FRBNY Fed later in September 2008. At that time, the FRBNY had to be used because TARP was not enacted until October 3, 2008. AIG got $40 billion from TARP on November 25.

6. Ultimately, the government pledged $182 billion to save AIG.

Does this smell just a little bit? Read on.

We learn what follows from the e-mail correspondence demanded by Congressman Darrell Issa just released last week. Congressman Issa requested this information following a news story from Bloomberg. (Bloomberg has done and excellent job following this story see their latest report here.)

7. In the October-November 2008 period, claims against AIG mounted. The AIG staff was prepared to negotiate claims down to 60 cents on the dollar inasmuch as AIG was effectively in receivership, with its liabilities exceeding its assets without the government support.

8. But then, two things happened:

  • The FRBNY instructed AIG to pay off claims in full;
  • The FRBNY did everything it could to keep the names of who was getting paid off out of the AIG reports to the SEC. It hoped the SEC would accept a total amount paid without the names of who got paid.

8. The SEC did not accept the report submitted by AIG without the names and amounts paid. On December 30, 2008, Jeffrey P. Riedler, Assistant Director of the SEC, send a letter to AIG requesting the details on who got paid.

The e-mails reveal considerable efforts of the part of the government advisors and their lawyers to keep payment details private. They were able to keep the details from being released until March 15, 2009.

9. The following table details who got paid what from AIG (billions of US$):

Securities

Direct

Maiden

Recipient

Lending

Support

Lane

Total

Goldman Sachs

4.8

2.5

5.6

12.9

Societe General

0.9

4.1

6.9

11.9

Deutsche Bank

6.4

2.6

2.8

11.8

Barclays

7.0

7.0

Merrill Lynch

1.9

1.8

3.1

6.8

Other

4.1

1.5

5.6

Bank of America

4.5

0.2

0.5

5.2

UBS

1.7

0.8

2.5

5.0

BNP Paribus

4.9

4.9

HSBC

3.3

0.2

3.5

Citigroup

2.3

2.3

Calyon

1.1

1.2

2.3

Dresdner Kleinwort

2.2

2.2

ING

1.5

1.5

Wachovia

0.7

0.8

1.5

Barclays

0.9

0.6

1.5

Morgan Stanley

1.0

0.2

1.2

Bank of Montreal

0.2

0.9

1.1

Rabobank

0.5

0.3

0.8

Royal Bank of Scotland

0.2

0.5

0.7

DZ Bank

0.7

0.7

AIG International Inc.

0.6

0.6

KFW

0.5

0.5

Credit Suisse

0.4

0.4

JP Morgan

0.4

0.4

Banco Santander

0.3

0.3

Reconstruction Finance Co.

0.2

0.2

Paloma Securities

0.2

0.2

Citadel

0.2

0.2

Total

43.6

22.2

27.2

93.0

Source: here

10. As I reported, Goldman was one of the banks that got paid in full: $12.9 billion.

Analysis

1. What was going on? The FRBNY did not act on its own. Paulson, the former head of Goldman, was in charge.

2. Why pay off the banks in full? It could be argued that Paulson feared a collapse of the entire banking system if they did not receive the full amount they were owed. This does not hold up. Goldman and other recipients said they would have survived if they got less.

The finance, insurance and real estate sector spent $459 million on Washington lobbying in 2008 (Open Secrets).

3. Why try to keep the payments secret? From the e-mails Issa obtained, it is certainly clear that the FRBNY staff and its attorneys did everything they could to keep this information secret. You only attempt a cover up like this if you feel you are doing something wrong.

The banks wanted to get paid in full.

4. Geithner: was he involved? A Treasury spokeswoman claims Geithner was recused from working on issues involving specific companies in advance of his nomination to be Treasury Secretary on November 24, 2008. Well, how about the September meetings? Geithner was involved from the beginning. And it is a real stretch to think he was not kept “in the loop” on something this big as it progressed.

Disclosure: No Positions

Source: Geithner and AIG Again?