Yesterday’s lead Bloomberg News report that the French banks were willing to accept a haircut on their AIG (NYSE:AIG) swaps suggests that the New York Fed lied about the controversial (read: scandalous) decision to pay off Goldman Sachs (NYSE:GS) et al at par for their derivatives contracts with the failing insurer:
France’s regulator was “open to further negotiations” to discuss the possibility of concessions by AIG counterparties Societe Generale SA and Credit Agricole SA’s Calyon unit , in November 2008, Neil Barofsky, the special inspector general for the Treasury Department’s Troubled Asset Relief Program, said in prepared remarks for a House oversight committee hearing today.
New York Fed General Counsel Thomas Baxter wrote to Barofsky last year that the regulator declined to demand concessions from U.S. banks partly because “it would not have been appropriate” when rivals in other nations were unwilling or “legally barred” from giving discounts. Baxter, Barofsky and Treasury Secretary Timothy F. Geithner, who was New York Fed president during the rescue, are scheduled to testify today before the House panel reviewing the $182.3 billion bailout.
The appropriate authorities should pursue the matter ruthlessly. What laws might have been broken is a matter for the relevant investigators and, ultimately, juries to decide. But the credibility of the Federal Reserve has been damaged to the point that drastic measures are required.
Add to this the New York Times story yesterday morning that two members of the Federal Reserve Board of Governors, Donald Kohn and Kevin M. Warsh, warned that the 100-cents-on-the-dollar payment to Goldman Sachs and other banks “might be a gift” to AIG’s trading partners. Fed Chairman Bernanke, who rubber-stamped the New York Fed decision, as well as Treasury Secretary Tim Geithner, who was president of the New York Fed when the payments are made, are compromised.
First of all the Fed needs spotless hands. Whether or not actual wrongdoing occurred, the Fed is guilty of miscommunication so egregious that it smells of coverup.
Drastic steps are required to restore credibility and confidence.
- Ben Bernanke should withdraw from consideration for a second term as Fed Chairman. President Obama should appoint former Fed Chairman Paul Volcker in his place. If Volcker, who is 82 years old, feels unable to accept the nomination for a full term, he should serve as Interim Chairman and head a search committee including bipartisan Congressional representation to find a permanent successor. If Bernanke insists on pursuing a second term, the Senate should vote him out.
- Treasury Secretary Geithner should resign. Whether or not he engaged in wrongdoing, his capacity to execute his office is damaged beyond repair.
I took issue with Paul Volcker’s proposal to ban bank proprietary trading, but that is a minor issue. Volcker’s distinguished career and unimpeachable integrity make him the man of the hour. I’ll take Volcker’s worst moments over Bernanke’s best.
This is not a partisan issue. The alleged malfeasance occurred under the previous administration, and Volcker became Fed Chairman under the Carter Administration. America can’t afford to heap onto the present economic crisis yet another crisis - of integrity.