No surprise here: The Federal Reserve Bank of New York, in a desperate headlong rush to rescue American International Group, screwed the pooch. Despite holding all of the cards, cash and power, they still managed to manuver themselves into a corner with “little negotiating room.”

So says the most recent audit from the Office of the Special Inspector General (SIG) for the TARP program (full embed here) :

“SIGTARP concludes that: (1) the original terms of federal assistance to AIG, including the high interest rate it adopted from the private bank’s initial term sheet, inadequately addressed AIG’s long term liquidity concerns, thus requiring further Government support; (2) FRBNY’s negotiating strategy to pursue concessions from counterparties offered little opportunity for success, even in light of the willingness of one counterparty to agree to concessions; (3) the structure and effect of FRBNY’s assistance to AIG, both initially through loans to AIG, and through asset purchases in connection with Maiden Lane III effectively transferred tens of billions of dollars of cash from the Government to AIG’s counterparties, even though senior policy makers contend that assistance to AIG’s counterparties was not a relevant consideration in fashioning the assistance to AIG; and (4) while FRBNY may eventually be made whole on its loan to Maiden Lane III, it is difficult to assess the true costs of the Federal
Reserve’s actions until there is more clarity as to AIG’s ability to repay all of its assistance from the Government.  SIGTARP also draws lessons that should be learned regarding the importance of transparency andratings agencies had on the AIG bailout.”

In other words, the deal that was cut in November 2008 with AIGs counter-party banks resulted in those banks being paid off in full for high risk credit-market bets.

Had AIG gone bankrupt, these firms would have recieved pennies on the dollar.  The banks that benefited the most included Goldman Sachs Group Inc., Merrill Lynch and large French banks Société Générale and Calyon. (See table below)

The New York Fed said its goal was to “prevent a system-wide collapse” and not obtain the best deal possible. So they got played for patsies.

Here’s the WSJ:

The “SIGTARP” audit provides a window into a bailout effort that has been shrouded by a lack of disclosure — acknowledged in the report — and questions over why the U.S. government in effect funneled tens of billions of dollars to U.S. and European banks that were AIG’s trading partners.

In November 2008, less than two months after the New York Fed first bailed out AIG with an $85 billion credit line, the government restructured its aid to AIG as the insurer’s cash needs mounted amid the market downturn. The revamped package included a company called Maiden Lane III buying complex mortgage-linked securities from U.S. and European banks to cancel insurance contracts that AIG’s financial–products division had written on the securities. The banks were effectively paid par, or 100 cents on the dollar, for those securities, which had declined significantly in value due to rising home-loan defaults.

The report acknowledged challenges the regulators faced, including insistence by most of the banks and a French bank regulator that they be paid in full. But the report said the “refusal” of the Federal Reserve and New York Fed “to use their considerable leverage,” in negotiations with the trading partners “made the possibility of obtaining concessions from those counterparties extremely remote.”

Its simply embarrassing and pathetic . . .

Counterparty payments

>

Sources:
FACTORS AFFECTING EFFORTS TO LIMIT PAYMENTS TO AIG COUNTERPARTIES
SIGTARP-10-003
NOVEMBER 17, 200
http://bit.ly/49y3iI

SIGTARP Audit

http://www.sigtarp.gov/audits.shtml

Audit Is Critical of N.Y. Fed in AIG Bailout
SERENA NG and CARRICK MOLLENKAM
WSJ, NOVEMBER 16, 2009

http://online.wsj.com/article/SB10001424052748704431804574540290325376348.html

Category: Bailouts

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

29 Responses to “Special Inspector General: NY Fed Screwed Up AIG Bailout”

  1. bsneath says:

    There is going to be a revolt in this country as more of this information comes out and as more people lose their jobs, homes, way of life, self esteem, chance to send their children to college, you name it.

    It is common for people to want to find someone else to blame for their misfortune. In this instance they will have legitimate reasons, persons and organizations to blame.

    I suspect this will get very ugly before it is over, because it will take fear before the greed-entrenched elitist class agrees to make the changes that are needed to save our economy and society.

    They can bemoan all they want – with their derogatory indignation -about the rise of “populism” – of a class of individuals who are less than their equals. Before this is over, the populists will prevail. There is simply too much information, too widely available, with too many watchdogs for the elitists to conduct business as usual, behind closed doors, through obfuscated legislation and governmental rules.

    The times they are a changing.

  2. SINGER says:

    Roger base this is SIGTARP over…

  3. TakBak04 says:

    Yep…”Fasten your seat belts…it’s gonna be a bumpy ride.”

    Wish we weren’t all going to have to be in that plane for the ride through it. Could have all been avoided. But, we have lessons to learn…and all of us are in it together tethered. (Maybe even those folks in the Compounds in CT and our friends in China and elsewhere)

  4. bsneath says:

    So, $40 billion went to foreign banks, $14 billion to Goldman Sachs and $8 billion to other American banks?

    Am I reading the chart correctly?

    Was it ever made public that nearly 2/3rds of the $62 billion bailout went to foreign banks?

    Was it ever made public that Goldman Sachs was the recipient of nearly 2/3rds of the remaining 1/3rd amount that went to domestic banks?

  5. TakBak04 says:

    I remember reading that we had to bailout the foreign banks because they had bought our crap on “good faith” from our ratings agencies.

    Paulson and the rest were carrying on that the “Global Economy” would implode. That was the basis for the bailout. At least that’s what I remember reading from articles at the time, and watching CNBC an the House Vote which vetoed the bailout on first round…but Senate sent it back after CNBC caterwalled loudly that the fate of the world was on Pelosi’s shoulders. After it was voted through with Senate pressure, I remember CNBC for a few days was trashing Congress. They shut up and went along with it all once they saw that Goldman got bailed out.

    It was a boondoggle. But, one can’t blame the foreign banks for not pressuring us when we sold them crap. Are they culpable in not doing due diligence? Sure…but it was such a mess and web of tangled financial instruments how could they sort it out when to this day, we don’t even know if our banks, the Fed and the SEC have been able to track it all down.

    So, it’s good to see the numbers on this, but what good does it do at this point? Until there’s a real investigation (a cold day in hell before that happens) and someone is held accountable what does it matter? Goldman Wins. They have “friends in high places.”

  6. TakBak04 says:

    And, BTW, it was just us who were selling mortgages to all who stopped in looking to buy. Ireland, England and Spain were all in housing and CRE bubbles. Whether their mortgages were as screwed up as ours or went into the same “global pool” we don’t yet know. But, assuming Goldman is everywhere and AIG was certainly international, it might be that it all got mixed together in some way and that’s why it was a Global threat of implosion.

    There were some suicides over there by bankers, if I remember correctly. One’s who had a conscience, perhaps…or who truly felt they might be held culpable at some point. The conscience or fear of prosecution didn’t seem to cross back over the Atlantic, however. It’s “bidness as usual” on this side of the big water.

  7. easystreet says:

    looks like Madoff wasn’t the only scam artist

    once again taxpayers take it in the ass and the the banksters laugh all the way to the bank

  8. VennData says:

    …which in effect means we also bailed out all the counter parties to the counter parties… and the counter parties to the counter parties… and you don’t need many more degrees of separation to get to your checking account. And that’s why it was done. For you, dear voter.

    So, now we will try to make sure it doesn’t happen again.

  9. bsneath says:

    Will not some MSM News Organization please undertake a complete and thorough investigation into these and related matters, such as the Governor of the Federal Reserve Board (Friedman) who made $5 million trading Goldman Sachs stock immediately after the Federal Reserve agreed to pay them $14 billion?

    Doesn’t anyone out there have a conscious? Where are the Woodwards and Bernsteins when you need them?

  10. bsneath says:

    VennData Says: “And that’s why it was done. For you, dear voter.”

    To which I reply,

    “Feeling fisted by the Invisible Hand of the Market lo these past fifteen months? Lost a job lately? Or half the value of your 401(k)? Or a home? All three? Been wondering whence the too-long-ascendant political and economic ideas and forces behind Greenspanism, John Thainism, blind Wall Street plunder, bankruptcy, credit-default swaps, Bernie Madoff, and the ensuing Cannibalism in the Streets? Then you, sir, need to give thanks to Ayn Rand Assholes everywhere—as well as the steely loins from which they sprang.”

  11. bsneath says:

    http://www.cnbc.com/id/33972133

    Meredith Whitney is calling for a second recession. Credit contraction is accelerating and the contraction will be greater than during the Great Depression, banks will need to raise more capital. Fun Fun Fun

  12. Marcus Aurelius says:

    Would any of these geniuses had made a similar deal with their own money? Hell no. Incompetence might not be criminal, but negligence can be. Where are the investigations? Where is law enforcement?

  13. bsneath says:

    How Geithner’s Fed screwed up the AIG bailout
    The Fed asked the banks for concessions. The banks said no. The Fed caved
    By Andrew Leonard

    The Special Inspector General’s Report on the A.I.G. Bailout has been released, and while I wouldn’t go as far as The Big Picture’s Barry Ritholtz, who says the New York Fed was “played for patsies” and calls the whole spectacle “embarrassing and pathetic,” the report sure doesn’t make the Fed look very good.

    (main body of the article)

    There were other reasons: The Fed was worried about the reaction of the credit rating agencies, it was concerned that it was confusing its role as AIG’s creditor with its role as bank regulator, and it was “uncomfortable with violating the principle of sanctity of contract.”

    OK. I’m wrong, again. It is embarassing and pathetic. The Fed was played for patsies. And it was Tim Geithner’s Fed.

    http://www.salon.com/news/bank_bailouts/index.html?story=/tech/htww/2009/11/16/geithner_and_the_aig_bailout

  14. david says:

    It’s always cute when millions are a rounding error.

  15. mathman says:

    David: Yeah, “cute” like when the JPL forgot to convert English to metric units and lost a $125 million satellite a few years back . . .

  16. highside says:

    Its not “embarrassing and pathetic”, its corrupt. Banana republic on steroids

  17. bsneath says:

    How much would banks set aside for bonuses if they were required to use mark to market accounting and as a result had to reveal their true losses?

    In other words, how much of what is going to be paid out in bonuses should be retained as capital to protect against known – but undisclosed – losses?

    Who will be put at risk if we have a double dip recession and any of these TBTF banks is unable to raise the additional capital that it needs? (rhetorical question)

    “Six of the top U.S. banks set aside $112 billion for salaries and bonuses, including deferred payments, during the first nine months of this year. The six banks are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo. “

  18. [...] Barry Ritholtz’s overall assessment of Tim Geithner’s bailout of AIG: The Federal Reserve Bank of New York, in [...]

  19. mknowles says:

    Bernie Sanders tried to warn everyone during the calls for the Big Bank Bailout last year. He tried to get an amendment attached to say no bailout funds for non-US banks. I (and I imagine a few thousand others) called my reps and every single rep on those committees, but the amendment was not approved.

    Paulson, Barney Frank, Nancy Pelosi, Barack Obama all knew that American banksters brought down the world economy and they felt they had to make these non-US banksters whole.

  20. riley says:

    Geithner’s first rule of career advancement. The bigger the screw up, the bigger your next job will be.

  21. Blurtman says:

    @bsneath,
    The AIG counterparties bailout story surface in September of last year (http://www.bloomberg.com/apps/news?pid=20601087&sid=aTzTYtlNHSG8&refer=home).

    The story then disappeared and then became big news earlier this year.

    Similarly Bloomberg reported on the AIG bailouts of which Geithner claimed he was unaware. It got to be so ludicrous that Geithner had to recalibrate his lies in front of Congress and claim that he first learned of the bonuses when staff members showed him the Bloomberg story months after it was released.

    The gov is populated by fraudsters. Obama is no different.

  22. bsneath says:

    The TBTF banks need to restrict this year’s employee bonuses to stock options not redeemable for 3 or 4 years. The $140 billion in cash saved should be used either to cover undisclosed losses or to expand credit and grow the economy. All of the TBTF banks need to agree (or be required) to use similar stock option approaches to lessen employee defections. They need to do this for the good of the Country and for the goodwill of their industry.

    My reasons.

    Cash bonuses at this point in the fragile recovery of our economy are not wise. They are too risky for the banks and too risky for the economy. Preserving this capital reduces any future need to raise capital. Capital that would be far more costly if it had to be raised out of necessity at a time of weakness.

    Stock options would demonstrate that the bankers are in the game for the long haul along with the rest of us. This would show America that the investment banks are part of the team, that they are working to make the economy stronger, that they are not just the greedy, selfish (fill in the blank’ers) that they have been portrayed as by the media.

    Banks should volunteer to do this, but if they cannot, will not or need political cover, then the Federal Treasury should mandate it. If Hank Paulson could force a shotgun wedding between Bank of American and Merrill, surely Tim Geithner can get these banks to agree to similar stock option bonus terms.

    Perhaps a better analogy: If Hank Paulson could get these same banks to agree to accept TARP money so as to not single out those in greatest need, then Tim Geithner can get them to agree to the same rules on stock option based bonuses so as not to single out those at greatest risk of future taxpayer bailouts. Geithner can argue that retaining this cash is necessary to accelerate the repayment of TARP funds and reduce the federal deficit and that requiring everyone to take the same approach is necessary for employee stability.

    This is the minimum the banks should agree to do given the billions of dollars of taxpayer subsidies they all have received in one form or another. Crap at $140 billion in stock option awards, they can even create a large new market trading in future employee stock option awards. (sarcasm)

  23. Blurtman says:

    Correction:

    Similarly Bloomberg reported on the AIG bonuses of which Geithner claimed he was unaware. It got to be so ludicrous that Geithner had to recalibrate his lies in front of Congress and claim that he first learned of the bonuses when staff members showed him the Bloomberg story months after it was released.

    The gov is populated by fraudsters. Obama is no different.

  24. [...] Fed got played in the AIG bailout.  (Alea Blog, Big Picture, WSJ, 24/7 Wall St., Dealbreaker also Megan [...]

  25. FrancoisT says:

    “But the report said the “refusal” of the Federal Reserve and New York Fed “to use their considerable leverage,” in negotiations with the trading partners”

    “Considerable leverage?” What leverage?

    The Fed had already proved to the entire world that AIG wouldn’t be permitted to fail. So, what kind of “considerable leverage” was available to the Fed?

    Interesting and thought provoking analysis of the whole saga here:
    http://economicsofcontempt.blogspot.com/2009/10/janet-tavakoli-all-bark-no-bite.html
    http://economicsofcontempt.blogspot.com/2009/11/geithner-vindicated-in-tarp-watchdog.html

  26. [...] “No surprise here,” writes Barry Ritholtz at Big Picture. “The Federal Reserve Bank of New York,” he writes, engaged in “a desperate headlong rush” to rescue A.I.G. “Despite holding all of the cards, cash and power, they still managed to manuver themselves into a corner with ‘little negotiating room.’ ” [...]

  27. [...] “No surprise here,” writes Barry Ritholtz at Big Picture. “The Federal Reserve Bank of New York,” he writes, engaged in “a desperate headlong rush” to rescue A.I.G. “Despite holding all of the cards, cash and power, they still managed to manuver themselves into a corner with ‘little negotiating room.’ ” [...]

  28. rickambrose says:

    This news to someone? Mr. “Nipper” Geitner heard ” the sound of his master’s voice” – and it was Lloyd Blankfein saying ” I want to be fully repaid!”

  29. [...] simply embarrassing and pathetic,” Barry Ritholtz writes at The Big [...]