Did Geithner Have a Choice?
After watching Tim Geither get torn a new one by the House today, I couldn't help but put into question the validity of some of his answers - especially of those relating to the Fed's repayment of AIG's swaps to counterparties such as Goldman Sachs and other big banks.
Geither asserted that when deciding what to do, the Fed "had no choice" but to pay back the swaps at 100 cents on the dollar, or else face the collapse of AIG and, in turn, the entire financial system. Now, it may well be true that if AIG wasn't able to honor its CDS contracts, it would have been faced with a credit rating's downgrade - losing investor's confidence in it's operations and making it much more difficult to raise capital - and eventually forcing it to file for bankruptcy. But my question is, was there another solution to this problem that would ensure AIG's viability, while at the same time honoring the counterparty swaps at a more realistic price? I understand that nobody at the time (and nobody still, for that matter) had any idea how to value these securities, but 100 cents on the dollar does seem ridiculous - these swaps clearly lost substantial value from when they were originally bought.
Geithner said that there was no alternative solution to what the Treasury and the Fed ended up doing, aside from letting AIG fail. A Congressman from Massachussetts replied that he believed they had to have other choices as there had to be "increments" between the two extremes (ie. haircuts). Were there, in fact, other viable options, or were Geithner, Paulson and co. simply trying to help out their buddies on the Street while using the seemingly easiest way to keep AIG afloat?
Goldman offered to take haircuts on their swaps weeks before the AIG bailout and the NYFRB told them to "stand down". Before it was a sure thing that the Fed was going to step in and save their asses, Goldman was already negotiating a reduced payoff on their swaps.
This was a blatant giveaway. The Fed could have insisted on across-the-board haircuts on AIG swaps and the banks would've lined up to take them. But why bother when the govt will pay you off at 100%?
Lil Timmy needs to get booted out. Suuuuch a scumbag.
Agree with Edmundo. 100% on the dollar was too rich. Too be honest, this doesn't bother me as much as the lack of transparency does. I want to be able to trace the money, not just see that $x billion went to AIG and they are "a little bit better now."
CompBanker, how dare you accuse Hank and Timmy of obfuscating their methods? If they’re anything, they’re open and honest ole chaps who only provide direct and incisive answers when they visit Congress. Not evasive in the least. In fact, I thank God every day for their keen ability to wave the magic treasury wand and save the world, all the while clearly explaining what’s going on. And if you tell me they have too much power, well then I hope King Obama offs your head.
Goldman bought insurnace. The "hurricane" came and destroyed the house. I'd be pissed if the insurance company told me that my house would not be paid for in full despite the fact that I paid my premiums. Government was right to pay out. It is their fault that there is not more governance over risk exposure.
Insurance cannot effectively operate in an unregulated market. Because of bankruptcy laws and the way insurance is structured you can take premiums representing risk higher than you will be held accountable for.
My thoughts exactly. This is no different than the type of brinkmanship that goes on during any prebankruptcy negotiation process (ie...pay me my money, or I'll see you in court). The government has no right to force private investors to take losses and essentially amend contracts ex post (similar to the madness that went on with the auto bailout). It would have been a step in the wrong direction to demand that american AND foreign banks take haircuts on insurance that they paid for. The loss of confidence in our financial system would have definitely outweighed the gains (probably the reasoning behind TGs giving them 100%)
^^^ great metaphor, it basically goes back to the people that cooked their personal finances to get a mortgage they coul not afford. I bet those people where the same @$$holes that protested in front of AIG when they got their bonuses. Human behavior is something else...Tame it.
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