TARP special inspector general Neil Barofsky has released a report regarding the incident last year in which then–New York Fed President (and current Treasury Secretary) Tim Geithner rolled over and arranged for financial institutions to receive full payment on the credit default swaps they had purchased from the tottering insurance giant AIG. Apparently, only UBS had a heart: They offered to shave off 2 percent of their tab. But Geithner's attempts to gain concessions from the other parties — among them Goldman Sachs, Société Générale, UBS, and Deutsche Bank — were "completely unsuccessful." In fact, he didn't even try to negotiate concessions. What's his excuse for lying down and giving the banks exactly what they wanted, a move that ultimately amounted to a back-door bailout, one that cost the taxpayers billions of dollars?
He didn't have any choice. Quoth the report:
FBRNY was confronted with a number of factors it believed limited its ability to negotiate reductions in payments effectively, including a perceived lack of leverage over the counterparties because the threat of bankruptcy had already been removed by FBRNY's assistance to AIG.
Barofsky is unimpressed. Geithner was the regulator, he said. That should have been his leverage.
The refusal of FBRNY to use its considerable leverage as primary regulators for several of the counterparties, including the emphasis that their participation in negotiations was purely voluntary made the possibility of those concessions extremely remote...in other instances in this financial crisis regulators (including the Federal Reserve) have used coercive language to convince financial regulators to take or forego certain actions...for example, Treasury and Federal Reserve were fully prepared to use their leverage to compel the nine largest financial institution... to accept $15 billion of TARP money and to pressure Bank of America to conclude its acquisition of Merrill Lynch.
So Geithner had a choice, Barofsky concludes. He chose to get ahead. He chose himself, and threw the taxpayer, the people he was supposed to be serving, under the bus. And, lest we forget: the people whose calls you take? That's the relationship you're in.
Factors affecting efforts to limit payments to AIG counterparties [SIGTARP via WSJ]
Earlier: Tim Geithner Sometimes Calls His Friends On Wall Street Just So They Can Listen to Each Other Breathe [AP]
Related: The Devil Wears Prada, Memorable Quotes [IMDb]