Go figure: Bush Treasury Secretary Hank Paulson and then NY Fed President Tim Geithner misled the public as to how bad AIG’s position actually was.

The two failed to disclose to the public that the AIG problem was even worse than reported. They described AIG’s problems as a “cash squeeze” when it was in fact a full blown bailout of AIG. WHat was supposedly a loan to a distressed company in fact was a bailout of dubious legality.

Had the reality of the situation been properly disclosed, the $185 billion rescue might not have been made. Hence, the fraud.

Here is McClatchy:

“At the peak of the 2008 financial crisis, then-Treasury Secretary Henry Paulson and top Federal Reserve officials told the nation that there was an urgent need for the government to lend $85 billion to the American International Group so the giant insurer’s temporary cash squeeze wouldn’t trigger global financial chaos.

Nearly two years later, taxpayers are on the hook for twice that amount, and it now appears that Paulson and senior Federal Reserve officials either plunged ahead without understanding AIG’s financial situation and the risks it posed to taxpayers — or were less than candid about one of the largest corporate bailouts in U.S. history.”

The key issue is whether the government had the legal authority to bailout AIG if they were insolvent. Hence, the motivation for ddeclaring a cash squeeze rather than a full blown bailoutThere is the secondary question of whether the rescue of AIG, as orchestrated by Henry Paulson, was really an indirect rescue of Goldman Sachs.

Recall that more than $90 billion in rescue money “flowed out the back door” of AIG to the banks that helped create the crisis. Of course, by now most everyone is aware just who the leading beneficiary of the federal/AIG largesse was: Goldman Sachs, where Paulson was CEO until June 2006.

When I first looked at AIG when researching Bailout Nation, it had appeared to be a “clean” insurance company with a renegade derivatives division called AIG Financial Products (AIGFP).

That turns out to be a false narrative. I missed the fact that the rest of AIG, according to McClatchy’s recent investigation, was also in deep trouble, as it too, was neck deep in derivatives. Not the $3 trillion that AIGFP was exposed to, but “$200 billion.”

For a supposedly prudent insurance company, this is a a ridiculous amount of risk:

“As the Fed wired billions of dollars to AIG in the fall of 2008, state and federal officials assured the public that the company’s financial woes were limited largely to [AIG FP], which had wagered $2 trillion on exotic financial instruments and incurred massive losses on housing-related investments. AIG’s six dozen U.S.-based insurance companies, the regulators said, were all on solid footings.

A McClatchy analysis of the finances of 20 of AIG’s larger insurance subsidiaries at the time has found a much bleaker picture, however: More than $200 billion in potential red ink was obscured by entanglements in which these subsidiaries bought stock in, reinsured or guaranteed debts of their sister companies.

Despite the regulators’ public assurances and AIG’s assertion that pooling arrangements among its subsidiaries made the liabilities look worse than they actually were, AIG has since propped up its insurance subsidiaries with $31 billion of taxpayers’ dollars, and its total debt to taxpayers — once as much as $182 billion — still could reach $162.5 billion.”

The fun never stops . . .

>


click for video

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Source:
AIG’s problems far greater than Bush officials told public
Greg Gordon
McClatchy Newspapers, June 8, 2010
http://www.mcclatchydc.com/2010/06/08/95534/aigs-problems-far-greater.html

Category: Bailouts, Derivatives, Federal Reserve

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.

41 Responses to “Paulson/Geithner Committed Fraud in AIG Disclosures”

  1. The full McClatchy article and the video are well worth your time.

  2. torrie-amos says:

    fwiw, just a note, IMHO, alot of the selling is possible related to REPO-105′s, where the top 20 banks hold more risk on there books then reported, and it seems like forever in the last two weeks of the quarter they clean the books up, if all 20 banks now have to get down to not lying about there books cause big brother is watching, which i can’t imagine there not with so much publicity, these banks are having too de-risk quite a bit

    my guess is that it’s more a confluence of events, than conspiracy, cause the repo issues didn’t come too light until lehman report and then some follow ups, so that’s march during the melt-up, when they all ha 100% trading days,

    we shall see

  3. Patrick Neid says:

    OK everyone, all together now, act shocked.

  4. Dennis says:

    Keep putting their feet to the fire.

    Paulson is a criminal and should be indicted. Geithner is no better

  5. Mark Down says:

    Wow, Paulson & Timmy. What are you doing this weekend?

  6. dead hobo says:

    Headline

    Paulson/Geithner Committed Fraud in AIG Disclosures

    reply:
    ————-
    Yeah, so, what’s your point?

  7. bsneath says:

    2/3rds of the “backdoor” payments through AIG went to foreign banks. The vast majority of the remaining 1/3rd went to Goldman Sachs. The American public would have never stood for this had they been given the facts.

  8. bsneath says:

    “Through three separate types of transactions, Goldman received an aggregate $12.9 billion. Among European banks, SocGen was the biggest recipient at $11.9 billion, Deutsche got $11.8 billion and Barclays was paid $8.5 billion.”

    AIG massive payments to banks stoke bailout rage
    http://www.reuters.com/article/idUSN1548789520090316

  9. bsneath says:

    http://www.npr.org/news/graphics/2009/mar/aig/

    Bank Amount (in billions)
    Goldman Sachs $12.9
    Societe Generale $11.9
    Deutsche Bank $11.8
    Barclays $8.5
    Merrill Lynch $6.8
    Bank of America $5.2
    UBS $5.0
    BNP Paribas $4.9
    HSBC $3.5
    Citigroup $2.3
    Calyon $2.3
    Dresdner Kleinwort $2.2
    ING $1.5
    Wachovia $1.5
    Morgan Stanley $1.2
    Bank of Montreal $1.1
    Deutsche Zentral-Genossenschaftsbank $1.7
    Rabobank $0.8
    The Royal Bank of Scotland $0.7
    AIG International $0.6

    Source: AIG (PDF)

  10. call me ahab says:

    BR-

    dude- please- as if everyone isn’t aware they are being lied and cheated at every turn-

    and VennData said yesterday- thank god for grownups like Geithner- I guess being grown up entitles you to commit fraud-

    many a banker that are grownups I guess

  11. Its Me says:

    So Hilary Clinton this week reportedly said we need to tax the rich more, but our actions are to use tax revenue to bail out the shareholders who invested and managed their capital unwisely.

    Can we honestly say that a risk assessment was done that indicated that to prop up the failed enterprises provided a better return than any alternative use for our treasury’s money?

  12. [...] Had we known the truth about AIG's condition, the bailout may never have happened.  (TBP) [...]

  13. Tarkus says:

    Are you sure when Kudlow talks about the “Bush Boom”, he doesn’t mean how he blew things up (literally and figuratively). Paulson is as good as “Brownie”, and Cox were. The corruption was palpable and so huge the nation is going to be suffering its after-effects for generations to come.
    Where are the perp walks ?

  14. b_thunder says:

    “….subsidiaries bought stock in, reinsured or guaranteed debts of their sister companies.”
    yesterday we found out that the banks are buying “products” from each other to keep prices higher than the market and maintain regulatory capital.

    it’s all one giant Ponzi that the Fed and Treasury keep “feeding.” Madoff wishes he’d been caught 6-8 years ago, when the scam was still small by comparison. we will soon wish that we’d stopped this madness earlier, but by then the Depression 2.0 will have set in, and Paulson will be bird-watching in a no-extradition country. Geithner will be (and should be as a career civil “servant”) hung either way.

  15. b_thunder says:

    so, Geithner and Paulson may have committed fraud. and what will the White House, Attorney general, Congress, public do about that?

  16. cvienne says:

    Last I checked, the “new Administration” has no desire to fire TG for his fraud…

    In fact, wasn’t he the first Cabinet Member hired in the first place?

    So basically I say “x2″ to DEAD HOBO’s comment…

    Yeah, so, what’s your point?

  17. cvienne says:

    I should say “alleged fraud” to be correct…

  18. Niskyboy says:

    Geithner didn’t pay all of the income taxes he owed. Therefore it was never a good idea to put him in a position of authority with respect to national money matters. This shows us why.

  19. dead hobo says:

    Fraud is a growth industry. Using national debt to finance consumption is a growth business. No matter who whines about unsustainable debt, the pile will continue to grow and sharpies will continue to get more than their fair share.

    It will all end in a decade or two. The debt bubble will explode. However, for all but the marginal players, the debt bubble won’t explode with a bang. Rather, it will be repudiated with a general consensus. The US and other profligate borrowers will just refuse to pay or offer a dime on the dollar.

    Logically, it will be economically rationalized as being the best and fastest way to solve the debt crisis. The general population will be taught by clever manipulation to see that paying off debts is the same as rewarding fraud, thus misplacing their anger towards the lenders rather than the fraudster beneficiaries. Debt holders will be offered a minimum amount in lieu of no payments after a prolonged legal fight.

    What is discussed above by BR is just the beginning. Fraudsters will play governments and central banks off against each other and manufacture new and ever more frightening scenarios that require bailouts and borrowed money to repair. The suckers in the game will be the money printers and the lenders (investors in debt, not lenders to business as they will continue to be scarce) The winners will be those who managed to snag some of that concentrated and likely to continue bailout wealth. What we have yet to see are the never ending string of new crises which require massive bailouts in near perpetuity. The European Debt Crisis is just the newest one and will certainly not be the last one. You need a crisis to shake cash from the money tree.

  20. KidDynamite says:

    Lowenstein’s “The End oF Wall Street” chronicled the AIG bailout pretty well. so sick. Paulson and Geithner talked tough to the banks the whole time – telling them “no government assistance, figure out how to bail out AIG with your own money” (not a direct quote) – but it was all a horrible bluff that failed. the banks couldn’t make the numbers work, and Hank/Tim picked up the tab.

  21. Marcus Aurelius says:

    If we exposed all of the fraud in our economy, it would culminate at the creation of fiat (fraudulent) currency by non-governmental entities (with the blessing of their government subsidiary), who profit handsomely at it’s creation and throughout its life-cycle. Fraud is everywhere nowadays. The economy is dependent on it.

  22. Dow says:

    b_thunder wrote:

    “….subsidiaries bought stock in, reinsured or guaranteed debts of their sister companies.” yesterday we found out that the banks are buying “products” from each other to keep prices higher than the market and maintain regulatory capital.

    That is exactly what happened in Iceland and what lead to the financial collapse there. It’s just that Iceland was so small, it didn’t take that long for the ugly to hit the fan so to speak.

  23. Lugnut says:

    Wall Street is a gutted shell and all that remains of the equities markets are institutional traders doing a HFT circle jerk with each other, while J6Pk retail investor says, ‘screw this’ and heads for the nearest fire exit. As a reward for our ‘willingness’ to bail out the rampant malfeance perhaps we will get a watered down reform bill hammered out against a full court press by bank lobbyists. It is to laugh.

  24. Mannwich says:

    And we wonder why the little guy/gal are now turning to fraud to make money (see BR’s post above about the Real Estate fraud). They’re merely following the lead of our “best & brightest”. Of course, where they mess up is they forget there are a different set of rules for them. When they commit fraud, they’re rewarded with more money, power, better paying jobs. When we do it, we go to prison.

  25. Ritholtz says:

    This Bush bashing is more proof that you are a liberal !

    How dare you question the motivations of dear leader’s Treasury Secretary!

    You are obviously a liberal commie bastard — because I dislike so intensely what you have said, I am moving this blog into my COMMUNIST bookmarks.

    Good day sir. I said GOOD DAY

  26. Mannwich says:

    @BR: LOL. So true. Apparently SOME can’t handle the TRUTH! ;-)

    Meanwhile, our bashing of the O man the Dems goes completely ignored by those on the Right.

  27. The Curmudgeon says:

    It’s interesting that you questioned the legality of the bailout. Dear God man, what has legality got to do with it? Trying to ascertain what is “legal” for the government is like trying to guess how Humpty Dumpty will define a word . Whatever the government says is legal, is legal. We are no longer a nation of laws. Laws are irrelevant in the face of government that decide on a whim what they mean.

    The latest in the BP saga is a good example. Obama wants to hold BP liable for lost jobs due to the government’s suspension of offshore drilling after the spill. I am all for holding BP liable for the direct consequences of the spill. But making them pay lost wages because the government voluntarily implemented a policy after the spill that cost people their offshore drilling jobs? The government might as well do to BP what it did to Chrysler and GM: Nationalize it, tell its creditors to fuck off, and give the booty to its political allies.

    We are officially a banana republic.

  28. Can someone please tell me how GS knew to sell 44% of their BP stock right before the well blew?

  29. ES says:

    I don’t see really much dffference between AIG shady bailout and TARP which was voted in by Congress in balatant disregard of the opnion of the american people. Both things were done because “bigh brother” new better than to listen to the american people.

  30. Mezrich says:

    That is not surprising in itself…What is surprising is the level of impunity politicians get in supposedly developed countries?
    Nothing will happen to them. As Mannwich was saying, what applies to the common man, doesn’t apply to our elites.
    We have not seen the worse yet !!! Civil unrest would not be surprising. Thanks to the Market, most countries have had to put in place austerity plans, at the worst time of course.

  31. [...] We were misled as to the true state of AIG.  (Big Picture) [...]

  32. batmando says:

    TC -
    right, as in “When the president does it, that means it is not illegal.” – Richard M. Nixon, May 1977
    “http://www.youtube.com/watch?v=ejvyDn1TPr8″

  33. DL says:

    ES @ 11:25

    Yes. And hopefully the voters will have the sense to throw out most House members in the November election.

  34. willid3 says:

    so if we (voters) throw out the current representatives (including our own by the way. I have noticed that most want to throw out some body else representative. but not their own?).
    who do we replace them with?
    the folks who helped create the TBTF bunch were in charge in 2001-2007. when the majority of this junk was created. the next crew came in to power on 01/01/2007.

    so just who else can we elect? the other parties don’t have the support of any thing near a majority of voters. usually because they have some ….view of the world that the rest don’t have.

    and what applies the common surf doesn’t apply the elites in businesses or corporations either. they can get a bailed out for a mess they created. but never allow the surfs to bailed out. thats socialism! the others not!

  35. Rescission says:

    You guys pound Paulson for the AIG payouts, which was a result of AIG’s own incompetence. What about what the Big O did to the Chrysler Bond Holders and giving the company to the union? Do we want the sloppy, incompetent federal government taking over auto companies? Insurance companies, and now are they now thinking of taking over BP? The Big O wants so badly to get his hands on an energy company. Then we can finally have a central plan for this economy.

  36. mathman says:

    Ah, “our” government “at work”.

  37. [...] Geithner and Paulson commit fraud in the AIG bailout: Barry Ritholtz thinks so. He writes: “The two failed to disclose to the public that the AIG problem was even [...]

  38. [...] Geithner and Paulson commit fraud in the AIG bailout: Barry Ritholtz thinks so. He writes: “The two failed to disclose to the public that the AIG problem was even [...]

  39. willid3 says:

    Rescission, i suspect that given the option, they would have really rather not have had to rescue Chrysler since that meant the economy was precariously close to a major depression and couldn’t handle the 200K jobs that would disappear over night. maybe yours too. hard to tell since so few actually know who their customers sell to (or theirs?). and i suspect that AIG problems wasn’t so much incompetence but arrogance. they ‘knew’ that nothing could go wrong with their business. just like BP just ‘knew’ that nothing could go wrong with what they were doing. and they told that to every one that they could. but thats the same thing every other energy company has said right up til April 20th.

  40. Crimedoespay says:

    We pay taxes but have absolutely no representation at all! If this were not a third world country the financial fraudsters/banksters of wall street, etc, as well as those government officials who aided and abetted them would have been put on trial for treason long ago, and publically executed after being found guilty.

    But since it is, they remain in power without as much as a hint of prosecution to worry about. No, the entire fraud machine has remained in place along with the totally corrupt environment that fostered the largest financial fraud in history. Yeah right…. crime doesn’t pay, Attorneys are honest, and no, this could never happen again, right?

    IMHO