Big news or big fail? In the world of today, factual innocence is irrelevant. Guilt by insinuation and denial is all it takes. Here’s a story of how one Republican representative leveraged the left’s anger at Wall Street and Timothy Geithner to make us all look foolish, while distracting attention from the true villain: AIG.
To get, AIG was supposed to give
In 2008, AIG was playing both ends of the credit default spectrum recklessly. They insured transactions for toxic securities while investing in those same toxic assets. This is oversimplified, but remains the fundamental reason they were on the verge of collapse and came to the government for help in 2008. As insurer of other banks’ losses while playing the investors’ game on the other side, they were double-dipping and doubling their risk all at the same time.
As part of the bailout, AIG was required to disclose its financial condition including exposure on outstanding credit swaps and toxic assets. The idea here is pretty simple: If the government is going to assume the risk, they need to know what that risk is, and forecast a plan to dispose of the risk in an equitable fashion.
That disclosure is to be made on form 8-K to the SEC. Companies are required to disclose anything which has caused a material change to the company’s outlook since the last SEC filing. Obviously, insuring and owning toxic assets is a material fact when the company is gambling money on both sides.
AIG and NY Fed huddle via email on disclosures
Rep. Darrell Issa unleashed some email communications on the press yesterday that seemed to tell a story of collusion between the NY Fed and AIG to withhold information on some of those credit swaps.
The story goes like this: There was a flurry of emails in November, 2008 exchanged between the New York Fed and AIG while AIG was on life support. At issue? How much information to disclose to the SEC regarding exposure on AIG’s credit swap obligations; specifically on contracts that, if disclosed, would have paid out at about 40 cents on the dollar. By not disclosing those contracts, AIG was able to cover them dollar for dollar, costing the government far more than would otherwise have been at risk. After all, the government can’t negotiate a settlement of securities if they don’t know they exist. Right?
As easy as it might be to think that AIG should have simply disclosed everything, there’s a difference between a securities-related disclosure and an insurance-related disclosure. This is the heart of what these emails address. There were insurance losses that AIG was obligated to cover dollar-for-dollar. Those differed from the securities losses AIG had as a result of playing the other side of the gamble. Further, AIG was reluctant to disclose the names of their insureds (banks and investment banks) for fear of eroding investors’ confidence further. This came to a showdown with Congress in late 2008, and ultimately AIG did disclose the list in early 2009, as did other bailed-out financial institutions.
Murkier still is an exchange which appears to instruct AIG not to disclose $10 billion in toxic assets held as AIG investments. So now we have non-disclosure of insurance obligations alongside investment obligations, with the net result being a taxpayer bailout of AIG which permitted a dollar-for-dollar settlement to other banks also receiving separate bailout payments from the government.
AIG acted in a foolish, reckless and imprudent fashion, and was then encouraged by lawyers at and for the NY Fed to suppress specifics of how foolish, reckless and imprudent they were from the government agencies and taxpayers bailing them out.
Disclaimer: This post is not intended in any way to defend AIG, the NY Fed or any person/persons involved in suppressing information. I think AIG’s conduct has been unconscionable from the beginning and this reinforces it, plus adds a few lawyers to my list. However…
Where did Geithner fit?
Nowhere. That’s the part of this story that’s just flat wrong, and the part of the story that’s getting all the play. Timothy Geithner is the guy everyone loves to hate. I’m not going to comment on whether that’s warranted or not, but in this case, it set the stage for a particularly damaging smear by Issa with assistance of left-leaning bloggers, who are calling for Geithner’s head on a platter served with a healthy helping of crow.
Fact #1: Geithner’s name is not on any of these emails. Not one.
Fact #2: At the time of the AIG disclosures and the flurry of emails, Geithner was president of the New York Fed; however, he had been tapped to be then President-elect Obama’s Secretary of the Treasury and had recused himself from all matters concerning AIG.
The only connection anyone has been able to make between Geithner and the AIG lack of transparency is this: it was “Geithner’s Fed“.
Perhaps that is enough. Perhaps not. However, this fact remains: No one has presented one shred of evidence showing Geithner was involved on any level. In fact, at the time these emails were flying around, Geithner was working on amending his tax returns and paying back taxes for errors made while he was working out of the country. The only link anyone can make is to say “Yeah, right, I don’t believe that for a second and I don’t need proof to trust my gut.”
Thankfully, the courts require evidence, and so does Congress. Usually, anyway.
Drawing that fine line between accountability and attacks
We live in an environment where a former Vice President, Press Secretary, and New York City mayor have absolutely no problem stating with a straight face that no terrorist attacks happened while George W. Bush was President, and worse yet, high-level media figures (that means YOU, George Stephanopoulos) don’t think there’s any need to correct the record. It’s Orwellian and destructive. They succeed because we have this weird, destructive American addiction to headlines without even a nod to underlying facts. Making news seems to be as simple as making a statement, factual or otherwise. This is how ‘death panels’ got traction. It’s one of the most powerful weapons the right has against the President and his advisors.
If it was “Geithner’s Fed“, and Geithner is “Obama’s Treasury Secretary”, that transforms into “Obama Allowed AIG Coverup.” See how easy that is? And what an easy get it was for Issa, who knew all he had to do was push an insinuation out there and let it be sucked up by left and right alike.
From what I see, some have gone from a mindset of holding the President accountable to making blood sport of taking him down with righteous fury, for all sorts of reasons. The net result mines populist rage for political gain, but not the kind of political gain that will benefit progressives, liberals, Democrats or whatever else you want to call them.
I’m certain there will be more clarion calls for Geithner’s resignation, with the left doing the right’s work for them. In the end, the ones who lose are those of us who see progress within our grasp, and fear it will slip away because unsubstantiated shots at unpopular government officials are a daily sporting event.
My advice? Remember the next time Darrell Issa gives you ammo, it’s likely to backfire. Issa was one of the chiefs of the US Attorney General firing scandal, after all. Would you eat anything he served without a food taster?
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