Rewriting History to Blame Tim Geithner: An Incomplete Story of the AIG Bailout

[Swede]

The bankruptcy code was designed so that no single creditor can jump to the head of the line. Once a company files in court, everyone – trade creditors, landlords, bondholders - must wait for an orderly resolution of all debt obligations. Even if a bank extends a cash-secured loan, that cash security is held by the bankruptcy estate. But creditors who holding derivative contracts get special treatment. They can immediately liquidate their contracts and move against any collateral outside of bankruptcy. This inconsistency in the law was a major reason why the Lehman bankruptcy turned out to be such a disaster. And it’s why everyone knew that an AIG bankruptcy was never a viable option.

It’s also why Geithner could never impose the threat of bankruptcy against the banks who held the credit default swaps. Even if AIG were to file for Chapter 11, the bankruptcy judge could not easily go after the cash collateral that the banks were already holding.

http://www.huffingtonpost.com/david-fiderer/rewriting-history-to-blam_b_372127.html

[opihimoimoi]

1. Real BULLIES...of the NPD Type...love TARGETS to pick on...in the office, on the job, everywhere...

they love to make troubles

they divide and and provoke discord...

They love misery and wish to share their pain with all of us...

Tim, Nancy, Obama, etc are all targets of the GOP Bullies

[lillypaddle]

2. and some "progressive" bullies, too.

Bet this thread sinks fast. K&R anyway.

[vaberella]

3. The Progressive Bullies are in full action on DU. You can check out several threads going on now.

nt

[opihimoimoi]

13. I have to suspect many are Conservative Bullies posing as Progressives

Why wouldn't they? Esp if they wanna make twoubles

[vaberella]

4. This is a great post but you know it won't matter.

People from everywhere hate Geithner from Repubs to Progressives and they will always blame him because he was associated with Goldman Sachs and the NYFed.


Anyway I applaud you for your effort, I'm rec'ing and :kick: this. Added to that it's been bookmarked and you've been added on the buddy list. Good post.

[inna]

5. :facepalm:

[Cha]

14. It is refreshing to get some scoop on Tim Geithner

that isn't all about what pos he is.

Who knew there was detailed information like this to take into account?

[gateley]

6. Thanks for this. Everything looks so cut and dried from outsiders' perspectives,

we really jump on the bandwagon without trying to find out WHY something was done the way it was.

Nobody in this administration, with all they've been handed, needs to be demonized without at least learning all the facts and considering all the options.

Thanks for this. Heading over to the HuffPo article now. I may still despise Geithner after reading it, but it's only right I consider another opinion besides my own knee-jerk one. :hi:

[girl gone mad]

7. Except that the administration can't possibly use this defense..

and expect to be taken seriously, in light of the way they handled bondholders in the auto bailouts. "samctity of contracts"? Not so much.

[Swede]

9. From the article-

Except the government was able to attain concessions from GM’s and Chrysler’s creditors precisely because those companies were going into bankruptcy. The essential element for an expeditious bankruptcy plan is that all the creditors of a certain class get equal treatment. But it’s almost impossible to get quick agreement on the fair value of CDOs protected by credit default swaps because there’s no cash market for CDOs. It’s easy to figure out the value of an oil swap or a euro swap, because oil and euros are bought and sold every day. But there is no active market for exotic CDOs. The valuation is done by analogy. The banks would have litigated the amounts of their claims for years.

[girl gone mad]

11. I'm talking specifically about the bondholders who did not agree to the terms..

of the restructuring.

The admin said "tough luck" to these investors, despite the fact that they would have gotten far better terms in BK court and the UAW would have been treated much less favorably.

You can't make the case for strictly abiding by contract law on the one hand, while on the other you're doing exactly the opposite, running roughshod over contract law.

http://blog.rebeltraders.net/2009/05/24/general-motors-bond-holders-prepare-for-war

Not only that, but with this article, Mr. Fiderer does the thing he so frequently accuses others of, he practices in historical revisionism. AIG's counterparties had already volunteered to take haircuts. Those CDS contracts were based on fraudulent representations concerning their safety as investment vehicles, therefore most would not have held up under the scrutiny of the courts. The prime obligation of the government to do what is best for its people, not to serve the interests of private banks. That is the social contract that we make with our democratically elected government. Any broad argument in support of the unfettered bank bailouts which denies these very basic foundational concepts, as Mr. Fiderer's article does in spades, is unsound.

[AllentownJake]

8. Would work as a defense if there wasn't evidence of firms offering to take a haircut

and Tim said no. I understand his reasoning for doing it, in his mind it was a logical way to inject capital into the financial system without having to go through the scrutiny of TARP. He thought the world was going to blow up and he handed out free money. He just found a path that bypassed the legislature.

However, why the hell the head of a FED bank had suddenly become an Insurance commissioner is an interesting part of American Financial History.

Seeing the reason he was overseeing this operation was playing fast and loose with the rules to begin with, it is an interesting way to approach a defense.

I think we had to do this is a better defense than trying to adopt a legal one.

[opihimoimoi]

10. The GOPiacs love to Quibble Nibble and Nit Pick...TIM is only one of their TARGETS

The Pubs Come to diminish TIM....they will do everything cept kill the guy

The Pretentious GOP is void of THE COMMON GOOD...

[girl gone mad]

12. Such a faulty basis on which to premise an argument.

The author seems intent on avoiding the most important question of all: were these contracts even legally binding to begin with? Would the courts have enforced them?

I can sell my neighbors $1 Billion insurance policies against risk of unemployment from widespread corporate bankruptcies. If I know I'm not good for the money, and my neighbors know I'm not good for the money, and the purpose of the policies is simply to provide a hedge to increase leverage, not to give coverage in a worst case scenario (as everyone agrees), then what court in the country is going to force me to honor these policies? Ahead of my mortgage holder, car note holder, college loan company, etc., simply because I call these insurance policies credit default swaps?

We would have been far better off had this been litigated, because it's extremely unlikely that the contracts would have ever been enforced.

The federal government has forced the UAW to renegotiate contracts, and it should have been willing to force haircuts on institutional CDS holders. Wall Street is no more sacrosanct than Main Street. A CDS is not some mystical contract written on holy paper and signed in blood.

[girl gone mad]

15. Another reason why this defense of Geithner is hard to buy..

Sorry, I've just been thinking about this piece intermittently today. If I had a couple of hours to write, I'd like to tear it apart line by line, but, for now, there is one glaring omission Fiderer makes, which essentially obliterates the idea that an AIG bankruptcy had to be avoided at all costs because of the company's CDO exposure. That omission is the fact that the monolines were allowed to go bankrupt, despite having greater aggregate CDO exposure than AIG (as well as that troublesome issue of municipal debt insurance).

Thomas Adams wrote an http://www.nakedcapitalism.com/2009/11/goldmanaig-conspiracy-theories-theres-a-reason-they-wont-go-away.html">excellent piece which delves into some of the reasons the monoline bond insurers were allowed to fail while AIG was bailed out. He posits that the dichotomous treatment boils down to Goldman Sachs. If AIG had failed, Goldman's days would have been numbered, but having interested men inside the government, with access to virtually unlimited funds, saved their sorry asses.

Some excerpts from Adams:

The business that caused AIG to blow up was the same that caused the bond insurers to blow up – collateralized debt obligations backed by sub-prime mortgage bonds (ABS CDOs). This was actually one of the few business that AIG Financial Products had in common with the monolines. AIG didn’t participate in municipal insurance, MBS or other ABS deals, which were all important for the monolines.

...

In addition, the monolines had exposure to many other assets classes that AIG did not which created chaos for the holders of those bonds when the monolines were downgraded. The chain reaction risk of the bond insurers was arguably greater, when you throw in the damage to the aucton rate securities market, which was rooted in the muni market. In 2007, MBIA had over $650 billion of par insured, Ambac had about $500 billion, FSA had about $380 billion and FGIC had about $300 billion. Throwing in CIFG and XLCA, the total insured par of the monolines was about $2 trillion – this amount certainly would qualify as large enough to be “systemic risk” if the insurers were allowed to fail.

In contrast, while AIG’s aggregate insured par was greater, the only portion that really presented a systemic risk exposure was the CDS and structured finance exposures, which had an aggregate par exposure of about $400-500 billion. a persuasive argument could be made that the monolines were just as intertwined in the financial system as AIG and, thanks to their municipal exposure, presented as great or greater a systemic risk to the financial markets and the economy.

Yet AIG was bailed out and the monolines were not.

So what happened? How did the monolines get dropped and AIG get rescued? The popular reason given has been that AIG was so big that they affected all segments of the economy, whereas the monolines were only midsized and not critical to the economy. i believe that SIGTARP repeated this version of events last week. I understand that Treasury Secretary Geithner last week repeated this notion and added new information – that he was concerned about the cascading risk of AIG’s non CDS exposure.

...

I have a different interpretation. I should note that I am a former employee of a bond insurer, so I admit to a bias. However, I my general perspective had been, until recently, that neither AIG or the bond insurers should have been rescued.

...

I hate to get sucked into the vampire squid line of thinking about Goldman, but the only explanation i can think of for why AIG got rescued and the monolines did not is because Goldman had significant exposure to AIG and did not have exposure to the monolines.

When it became clear that AIG could face bankruptcy, Goldman’s plan to profit by shorting ABS CDOs was threatened. While they had the collateral posted, thanks to the downgrades, this collateral could be tied up or lost if AIG went bankrupt. This was a real crisis for Goldman – they thought they had outsmarted the subprime market with their ABS CDOs and outsmarted all of the other banks by getting collateral posting from AIG when they got downgraded. But if AIG went away, this strategy would have blown up and cost Goldman billions.

All of this is essentially factual and based, for the most part, on public information.

As a matter of speculation, i believe that Goldman and their helpers deliberately pumped up the media with the threats that the subprime market posed in order to hasten the collapse of the subprime market. this allowed them to realize their gains sooner from shorting ABS CDOs – they had become impatient waiting for it to blow up.

In addition, I believe that Goldman and their helpers – including their many connections with the White House and the Fed – pumped up concerns about the systemic risk that the market was facing from a Lehman and AIG failure, so that they could force the government to step in and bail out AIG. This would also explain why Lehman was not bailed out. Lehman didn’t really matter to Goldman. But the fear created by Lehman’s failure served as a good excuse for why they should rescue AIG.

Almost any way you slice it, this attempt to excuse Treasury's actions as somehow necessary or unavoidable falls far short of the mark.