I'd usually expect a seasoned liberal political observer like Meteor Blades to be able to recognize a Republucan demagogue trying to score some quick political points. But today, Meteor Blades found himself in common cause with California Republican Darrell Issa, as Issa was successfully demagoguing the AIG issue to score points against Tim Geithner, who Republicans perceive to be an Achilles Heel in the Obama Administration.
Issa is on the warpath against Treasury Secretary Tim Geithner, and it appears he is trying to invent a smoking gun from some relatively benign emails that have recently been released by AIG in response to factfinding requests. From a Bloomberg article, as quoted by Meteor Blades:
"It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information," said Issa, a California Republican. Taxpayers "deserve full and complete disclosure under our nation’s securities laws, not the withholding of politically inconvenient information."
http://www.bloomberg.com/...
Several points need to be made:
1. The case that the New York Fed exerted any undue or "deliberate pressure" is extremely weak. While email correspondence reveal that the issue of whether or not to disclose AIG's CDO counterparties was a topic of discussion, and while the Fed's lawyer had arrived at the opinion that disclosure was not necessary, reports seem to show a fairly low key correspondence between Fed counsel and AIG's lawyers. For example:
"We believe that the agreements listed in the index (i.e., the Master Investment and Credit Agreement and the Shortfall Agreement) do not need to be filed," wrote Peter Bazos, a Davis Polk & Wardwell lawyer representing the New York Fed wrote on Nov. 25, 2008, to AIG attorneys. "Please let us know your thoughts in this regard."
http://www.reuters.com/...
Unless there is some kind of code here or in other emails that have been reported, I see nothing that I would call "pressure". You can read the emails in raw form here; I went thru a few of them and found nothing that stood out at me as an instance of "pressure".
And the fact is that the Fed's input in AIG's financial reporting to the SEC was appropriate, since it was essentially running the subsidiary set up to handle the CDO transactions.
2. There's no evidence in the reports that Geithner was personally involved in this matter at the time that the counterparty disclosure issue came up. This inconvenient fact seems to be lost on Geithner's critics. None of the emails cited in reports were from Geithner. In fact, Geithner was recused from AIG matters at the time, according to a Treasury Department spokeswoman. Despite these facts, Meteor Blades even went further than Issa did by endorsing this post at the blog Credit Writedowns. Meteor Blades said that it is "correct" to call this "extremely damaging" to Geithner personally, and that "he has now been personally implicated in withholding – covering up, if you will – vital evidence on the looting of taxpayers to the benefit of financial companies." This is not a fair assessment of the evidence.
3. The issue was quickly resolved; the SEC requested that the counterparty information be disclosed, and it was disclosed in March. Shortest. Coverup. Ever. And it appears that the release was not due to any particular legal obligation to do so but rather was in response to Congressional grandstanding.
4. This disclosure issue is very narrow to begin with. It only involves the list of counterparties. It was already public knowledge that AIG had paid off its CDO counterparties at par:
A similar split of eventual gains, if there are any, will apply to another special-purpose vehicle set up to sweep most of AIG's multisector CDS risks off the company's financial statements. The Fed has made a $30 billion loan to this vehicle, and AIG has contributed $5 billion in equity. To cut through the details of this labyrinthine transaction, the $35 billion total, plus collateral that AIG's counterparties held, is intended to make these parties whole on about $65 billion par value of CDOs.
Fortune, 12/23/2008
5. Issa and his allies are totally ignoring the big picture. AIG was a backdoor bailout, and a pretty successful one as it has turned out! Nobody ever denied that the intervention in AIG was done to save its counterparties. The whole reason to bail out AIG was to save other, more systemically important institutions that might have failed if AIG defaulted on its CDOs.
If Meteor Blades wanted to give a nod to a conservative, a better choice would have been former Dallas Fed president Bob McTeer, who, rather than kneecapping Geithner to undermine a Democratic administration, recently defended the actions of the New York Fed in the AIG matter by pointing out the obvious and legitimate reason why AIG's counterparties were paid 100 cents on the dollar:
...[T]he point of a "bailout" or assistance to a systemically important institution is not to save the institution itself but to limit the collateral damage. If that is the rationale of the assistance, it would seem inconsistent to intervene and then inflict the damage on counterparties that the intervention was intended to prevent. And, can you give some counterparties a haircut and not others? It’s a can of worms the New York Fed apparently decided not to open.
Bob McTeer
6. Unlike many other bailouts, the AIG bailout is likely to cost the taxpayer nothing once the dust settles. That does not mean that the taxpayer does not deserve full disclosure of events that clearly put taxpayer funds at risk, but I think that folks like Issa are relying on the subtext that Goldman Sachs, etc. are going to be keeping billions in taxpayer money from the AIG bailout.
I am all for dissecting the series of events surrounding this financial crisis and how it was handled. But if this process is going to degenerate into an effort to make Tim Geithner a scapegoat, very little is going to be accomplished.