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Reuters reports that the "TARP Cop" Neil Barofsky, the Special Inspector General of the Troubled Asset Relief Program (TARP), is looking to probe whether or not employees of the Federal Reserve Bank of New York pressured AIG officials to not disclose payments made to the top global investment banks as part of Credit Fault Swap (CDS) obligations. AIG's investors should not have been denied this disclosure.

Taxpayers are out about $30 billion because the Federal Reserve and ultimately taxpayers by way of TARP "investments" made a long list of global investment banks whole. This bailout was repugnant, but probably necessary in the fall and winter of 2008. I think five more Lehman-like investment bank failures would have cost a lot more than $30 billion and led to much higher unemployment rates than 10 percent.

Below is a diagram of how taxpayers lost $30 billion on AIG, based on U.S. Treasury estimates:

I hope against experience that the Oversight and Government Reform Panel will use this lesson to move towards requiring higher collateral standards from credit default swap protection sellers. Further, it should push the Fed to demand higher capital and liquidity standards from investment banks so they will not be so vulnerable to a single derivative counterparty. Yet, I expect the hearings on Wednesday, January 27, 2010, will be more about political posturing than any meaningful effort to avoid the next crisis.

Here is a sneak peak of the circus:

Tim Geithner's grilling is the main event on Wednesday, January 27, 2010 beginning at 10:00 AM. On the under card are two former Goldman Sachs heads Hank Paulson and Stephen Friedman. The latter less famous Goldman Sachs alum has a lot of explaining to do according to Dealbook.

Disclosure: I only have long positions in broad-based index funds. I do not own individual securities in the companies mentioned.

Source: Tim and the Gang Answer for AIG