Legal Commentary

The Geithner AIG Scandal

By Big Tent Democrat

Treasury Secretary Tim Geithner's answer on the the question of why AIG counterparties (most prominently Goldman Sachs) is laughably absurd:

Representative Dennis J. Kucinich, Democrat of Ohio, excoriated the New York Fed’s decision to pay 100 cents on the dollar to A.I.G.’s counterparties, including $2.5 billion to Goldman Sachs. “Isn’t it true that the New York Fed gave Goldman Sachs a better deal than it could have ever expected from A.I.G. or any other market player?” Mr. Kucinich asked.

Mr. Geithner replied: “Under the laws of the land, we did not have the ability. So we faced a very simple choice: Let A.I.G. default, or prevent it. And there was no way — financial, legal or otherwise — we could have imposed haircuts, selectively default on any of those institutions, without the risk of downgrade and default.” Mr. Geithner added that the negotiating position of A.I.G. was weak. With the ability to threaten default or allow A.I.G. to restructure in bankruptcy, negotiators were not in a position to make banks to take less on their contracts.

This is ridiculous. I'll explain why on the flip.

Geithner could have provided any number of answers to this question (in the national interest, etc.), but a lack of bargaining power on the part of the federal government in that situation is not one of them.

Geithner disingenuously couches the question as one of whether the federal government had the legal power to require haircuts from the AIG counterparties. That was not the issue. The issue was was the federal government going to come in and back AIG. Geithner argues that the counterparties could threaten the federal government in this situation because they could force AIG into default and bankruptcy. Excuse me? That was as much a threat to the AIG counterparties as the federal government (accepting the theory that an AIG failure would lead to a depression.) Think of it this way - how much of a haircut would the AIG counterparties have had to take if AIG went into bankruptcy? That was the bargaining power held by the federal government.

Geithner's answers are a disgrace. I do not believe them. He is an abject failure as Treasury Secretary.

He should resign.

Speaking for me only

Full post as published by TalkLeft on January 27, 2010 (boomark / email).