How Tim Geithner Bailed Out Wall Street Joel Skousen - Editor World Affairs Brief

How Tim Geithner Bailed
Out Wall Street
Joel Skousen - Editor
World Affairs Brief
10-30-9


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While this isn't news to readers of the WAB, it is confirmation of my extensive analysis throughout the crisis last fall. Henry Blodget and Bloomberg News get it mostly right, but they still shy away from exposing the wider outright conspiracy that exists between the US Treasury and the Federal Reserve.

"When the historians finally finish sorting through the appalling decisions that have been made in the past two years, this one will probably be at the top of the heap. Last fall, as AIG began to realize how screwed it was, it started negotiating with the counterparties to all the credit default swaps it had written. One of the AIG's goals was to persuade these counterparties--including Goldman Sachs--to accept buyout discounts of as much as $0.40 cents on the dollar.

"But then Tim Geithner, head of the New York Fed, stepped in. A few weeks later, the counterparties--all of whom voluntarily did business with AIG and understood the risks [no, they were deceived about the risks]--were bailed out at par: 100 cents on the dollar [In fact, it was not ALL the creditors--but only the larger insider banks and institutions both here and abroad].

"Thus began the most nauseating giveaway in the history of the country. Bloomberg has the whole sickening story: 'The Federal Reserve Bank of New York, the regional NY Fed office with special responsibility for Wall Street [run by Tim Geithner], opened an $85 billion credit line for New York-based AIG. That bought it 77.9 percent of AIG and effective control of the insurer [a willing partnership between thieves]. The government's commitment to AIG through credit facilities and investments would eventually add up to $182.3 billion.'

"'Geithner's team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps --insurance-like contracts that backed soured collateralized-debt obligations... Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the 'haircut' the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar. The content of its deliberations has never been made public...The New York Fed's decision to pay the banks in full cost AIG -- and thus American taxpayers -- at least $13 billion. That's 40 percent of the $32.5 billion AIG paid to retire the swaps. Under the agreement, the government and its taxpayers became owners of the dubious CDOs, whose face value was $62 billion and for which AIG paid the market price of $29.6 billion. The CDOs were shunted into a Fed-run entity called Maiden Lane III.'"

Now that this accusation is hitting the streets, the Washington Post, comes to the rescue to give the Federal Reserve's reason for giving favored banks 100 cents on the dollar. "The Federal Reserve Bank of New York said Tuesday that it had no choice but to instruct American International Group last November to reimburse the full amount of what it owed to big banks on derivatives contracts... The officials said AIG lost its leverage in demanding a better deal once the company had been saved from bankruptcy"

That's circular reasoning, and quite untrue. They only lost their leverage because of federal intervention which stopped their negotiations. The reason the Fed stepped in precipitously was to specifically save their banking buddies from having to accept 40 cents on the dollar. AIG did default on some obligations to non-insider institutions and pension funds. That's the untold story.

It's no wonder that a backlash is building in Congress against the Obama administration's new regulatory plan--which is more of a cover for making future bailouts permanent. Reuters reports that "Both Democrats and Republicans broadly criticized the strategy at a public hearing convened by the U.S. House of Representatives Financial Services Committee chaired by Barney Frank [who is in bed with the Fed on this]. 'The bill we're considering today would merely institutionalize 'too big to fail',' said Republican Representative Jeb Hensarling, referring to a perception that financial giants could count on government [future] bailouts.

"Democratic Representative Brad Sherman said the Obama plan would provide 'permanent, unlimited bailout authority.' He said it would give 'unprecedented powers for the executive to decide spending and taxes, without congressional approval; and, depending on the desires of the executive branch from time to time, the greatest transfer of money from the Treasury to Wall Street in U.S. history.'" Indeed.

IS THE STIMULUS WORKING?

Yes and No. Yes, in a temporary artificial way; but not in the long run. Direct injections of cash to buyers as in the Cash for Clunkers program worked, but only until the money ran out. Total cost of the program to taxpayers was $24,000 per car! The $180B tax rebates "worked" (in an inflationary way) last year, but can't be sustained. House price declines leveled off in tandem with the government's $8000 incentive program, but new home sales have dropped again, proving that temporary stimulus only works as long as there exists potential first-time buyers who can afford a loan. Once that group was exhausted, housing prices started down again. Congress is now looking to broadening the program for everyone to keep the stimulus going. It would be a greater boon to the economy to simply let house prices fall further, making them more affordable in the long term for everyone.

One of the problems created by past incentives is that there were plenty of ineligible applications for rebates, so now the IRS is being forced to audit manually all tax returns claiming the $8,000 federal housing new home credit--causing long delays.

The stimulus money is actually concentrating its effect on the speculative markets, fired up by the "carry trade" in dollars. A carry trade is created when one government offers below market interest rates for borrowing currency, just as Japan did during their decades-long recession. The money is borrowed and invested elsewhere (carried) and the investor pockets the interest rate difference. Now it's the dollar dominating the carry trade instead of the Yen. Insiders can borrow at the Fed for almost zero interest and invest those dollars in other nations and in any number of hedges with a profit potential. That's how the biggest US banks, in a declining economy, showed such massive profits less than a year after government bailouts.

Countries like Brazil are trying to take advantage of this new speculative influx of dollars in the carry trade. The government just slapped a tax on foreign investors of 2% on all foreign purchases of Brazilian fixed-income securities and stocks, effective immediately.

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Copyright Joel Skousen. Partial quotations with attribution permitted
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