When And What They Should Have Known

There is a major piece missing from your puzzle Mikey. Its not just about when they knew bonuses were coming. Its about knowing when they knew HOW MUCH the bonuses were going to be. Elijah Cummings was on top of the story but he wasn’t going after the FP bonuses as much as he was investigating bonuses that Liddy himself had signed off on after becoming CEO. Thats another story that you aren’t reporting that is probably a bigger one. There is 1 billion dollars in a bonus pool for workers in other sections of AIG that Liddy himself was party to.
.
Now the truth is while these bonuses are an outrage getting them back will do nothing, absolutely nothing, to help stabilize AIG. Nor would getting bonus money back from Wall Street help to stabilize the big banks. Its a story and people are genuinely pissed off but Geitner’s real job is a lot more macro than the bonuses. Thats the truth of the situation whether anybody wants to notice or not. His job shouldn’t be to negotiate bonuses, thats what Liddy was installed to do. If anyone needs to be fired its him and any other CEO still handing out bonuses after getting TARP money. It is what it is.

OK, I know about this one.
Are there any other stories out there?

TIME’s Massimo Calabresi has reported
.
Thanks for saving me the trouble of actually following the link.

“Are there any other stories out there?”
.
Here ya go.
.
The Big Takeover
The global economic crisis isn’t about money – it’s about power. How Wall Street insiders are using the bailout to stage a revolution
.
http://www.rollingstone.com/politics/story/26793903/the_big_takeover/8

Geithner: Gotta go. Now.
.
There is a practical benefit to punishing the Obama-Geithner braintrust for the bonus fiasco. The sooner Obama realizes that defending the Wall Street pirates is going to have significant and lasting political impact, the sooner he may change course and bring it some sane advisors.
.
Query: Which young President was more poorly advised by his genius advisors? Kennedy on Vietnam or Obama on bailing out Wall Street.

Michael Scherer:
.
TIME’s Massimo Calabresi has reported…
.
Here’s what Massimo Calabresi has “reported”:
.
…a Federal Reserve source tells TIME…
.
That’s not reporting, that’s being a conduit for gossip.
.
Your post should really read “Somebody who wasn’t willing to put their names to their claims told Massimo Calabresi while he was digging for dirt…”
.
Somewhere along the line, communications broke down.
.
Somewhere along the line, giving interested parties accountability-free anonymity and a platform for uncritical stenography of whatever those interested parties say resulted in nobody actually knowing anything about anything, Michael Scherer.
.
I guess we just have to hope that muddied waters don’t help the bad guys in this, whoever they are. It’s not like the press corps exists to clarify anything.

The danger we face is doing more damage to solve the problem than the problem itself causes. The bonuses are a symptom of the problem, not the problem itself. It’s certainly appropriate to figure out who effed up on the blindsiding of the administration, but the whole effort is inflating the importance of this episode over the larger systemic problems we face.
.
Less finger pointing and more historical research would seem to be the order of the day.

Here’s Krugman’s take:
.

I’ll leave to others the question of who knew or should have known that the bonus firestorm was coming; but it’s part of a pattern. At every stage, Geithner et al have made it clear that they still have faith in the people who created the financial crisis — that they believe that all we have is a liquidity crisis that can be undone with a bit of financial engineering, that “governments do a bad job of running banks” (as opposed, presumably, to the wonderful job the private bankers have done), that financial bailouts and guarantees should come with no strings attached.

.
He’ll leave it to “others” because it’s largely beside the point.
.
Geithner and Summers are still pretending that we can all just forget about what happened, and go back to (their) business as usual. While they keep shoveling money into a furnace, and the deficit climbs toward $3 trillion, and still banks don’t make the kind of loans necessary to keep a non-bubble economy growing, that’s not going to happen.
.
It’s not that they don’t know what they are doing, it’s that they know exactly what they are doing, but Geithner and Summers are sadly wrong –Rumsfeld kind of wrong.

I will quote this post from this morning’s Great Orange Satan:

“Question
by Jed Lewison

If the mainstream media had put 10% of the effort into investigating Bush Administration claims of WMD as they are into the claims that Tim Geithner and/or Chris Dodd facilitated the AIG bailout bonuses, what are the chances we would have gone to war in Iraq?”

http://www.dailykos.com/storyonly/2009/3/19/710791/-Question

“At every stage, Geithner et al have made it clear that they still have faith in the people who created the financial crisis”
.
And that is the very reason why Geithner is the absoultely wrong person for this job. Its not because he does not know what he is doing. He knows perfectly well what he is doing. He is soley focus on perserving the way of life of the elites that got us where we are today.

SG–here we agree most strongly. I don’t want my treasury secretary involved in something as trivial as bonuses. With the whole world going to hell in a hand basket could we let him stay focused on keeping us from running off the road.
.
I know the bonuses are appalling but in the grand scheme of things they are such a small percentage of the monies we have at stake I want Geitner to keep his eyes on the ball. Let’s face it, the only reason we are focused on the bonuses in the first place is because it’s the only part of this crisis the media and most of Congress for that matter can understand.

reposted from the other thread.
.
I have a question for those who are in favor of nationalization. Where will we get the money to do it? Especially in light of the report earlier this week that the FDIC reserves are low because of a dumb ass decision in 1996. Are we going to borrow money to give banks so they can lend it out? And if so isn’t that much the same thing they were doing when the house of cards came tumbling down? Hey I am all for doing something to get the banks back to working but I am not sold on nationalization primarily because of the costs. So if someone can explain to me where we would get the money to nationalize the big banks I am open to hearing you out.

I know the bonuses are appalling but in the grand scheme of things they are such a small percentage of the monies we have at stake I want Geitner to keep his eyes on the ball.
.
Dee, you seem to be completely missing the point. People aren’t merely upset because of the money (although I find it laughable that saving a few hundred million dollars for taxpayers is somehow beneath the paygrade of the Secretary of the Treasury).
.
People care because Geithner’s behavior vis a vis the bonuses gives us tremendous insight into his attitude regarding the entire crisis. Guess what? Geithner wasn’t oblivious to the bonuses because he was busy keeping his eye on the ball. He DOESN’T have his eye on the bal. That is the problem. The bonuses are the canary in the coal mine that tells us that the Treasury Department is a toxic environment.
.
Geithner should be fired yesterday. Obama should reverse course immediately. Obama should put together an expert team of economists that have as much independence as possible from the Fed, Goldman, AIG, etc. The simple question should be “how much of the CDS market can be flat-out allowed to fail without pulling down the rest of the World’s economy? And what other governmental actions (e.g. direct lending by the government; TARP-like funds to solvent, responsible banks; increased stimulus spending) are necessary to allow the gamblers to take their losses without killing the rest of us.
.
If we absolutely must bail out foreign banks, etc., I would suggest that Obama be completely forthright with the public about it, demand commensurate funding by foreign governments, and insure that the terms that we receive are the absolutely most favorable terms possible to negotiate (Since the alternative for the bankers is “the world plunges into chaos and we hand out pitchforks to the mob,” I expect favorable terms could be agreed upon.

Stuart, Massimo’s Fed source gave information that was subsequently confirmed by Treasury. (keep reading the story.) That is not gossip. That is reporting.

sqr1, these bonuses are like 1/10000 of the money we gave the company. I don’t want Geithner approving every purchase the company makes.
-
Posted around here yesterday:
-
“Same thing with AIG. The controversy that gets discussed is less expensive and less important than the bigger picture– how’d this happen, why are the same ppl there, and where has the free money we’ve given them in lieu of bankruptcy gone? I don’t mean to criticize this post– nothin’ wrong with this sort of thing on a blog, and I didn’t know about the hot dogs or the renovations. But the larger coverage isn’t much more penetrating than this, unfortunately.”
-
Wow, that guy sure is prescient!
-
Hey, have you heard that there’s lots of really important stuff going on, but the money-hemorrhaging print media is failing to inform people about it in favor of focusing on comparatively trivial shiny-object bullsh*t?
-
OMG IT’S A SCANDAL!!! Someone get Massimo Calabresi to report on it!

“…Geithner is the absoultely wrong person for this job. Its not because he does not know what he is doing. He knows perfectly well what he is doing. He is soley focus on perserving the way of life of the elites that got us where we are today.”
.
I’m pretty sure that’s why they picked him.
.
And Krugman has it exactly right. The smart question is whether they should have seen that “the bonus firestorm was coming”. From a practical/policy standpoint, it’s meaningless. At least compared all the other malfeasance and fraud.

“I have complete confidence in Tim Geithner and my entire economic team,” Obama said. “Nobody is working harder than this guy. He is making all the right moves in terms of playing a bad hand.”
.
Heck of a job, Timmy.
.
Wake up, Barack.

SG:
.
So if someone can explain to me where we would get the money to nationalize the big banks I am open to hearing you out.
.
The argument is that it will cost less than what it’s costing now.
.
“Where we would get the money” is the same place we’re “getting the money” to hand over to AIG –so that AIG can take half of it and give it to the financial products divisions of US banks.
.

Country———AIG-related payments in billions of dollars
.
US————–43.5
.
France———-19.1
.
Germany———16.7
.
UK————–12.7
.
Switzerland—–5.4
.
Netherlands—–2.3
.
Canada———-1.1
.
Spain———–0.3
.
Denmark———0.2
.
.
Total———-$101.3 billion
.
Total to US counterparties: $43.5 billion
.
Total to non-US counterparties: $57.8 billion

.
Makes sense, SG?
.
The problem is that we keep handing hundreds and hundreds of billions of dollars over to these institutions, and these corporations keep doing what they normally do with money, i.e. protect their own balance sheets, shield their stockholders from whatever losses they can, and resume business-as-usual buying and selling of financial products –none of which solves any of our economy’s problems, and all of which require much, much more money than Treasure has asked for so far. Plus, the elites who were incompetent enough to crash the Titanic are still at the helm directing their families into First Class lifeboats. We simply can’t afford to leave people in charge whose first concern is the preservation of a system that leaves themselves unexposed to financial losses, instead of what doing what works to get money flowing into productive hands.
.
The question isn’t “Where are we going to get the money to nationalize banks and securities insurers?“, SG, it’s “Where are we going to get the money if we don’t nationalize banks and securities insurers?“

No it actually doesn’t make sense SZ because as I said to you before we HAVE effectively nationalized AIG. Liddy was hand picked by Bush to lead AIG and the leadership that was there was fired and we own 80% of the company. Yet we have still dumbed 170 billion in, by far more than any bank, and they just posted the biggest loss in US history. Now if you are saying we can dump anywhere near that same amount of money into the banking system I am calling bullsh*t. You just made the case AGAINST nationalization when you really think about it.

OMG IT’S A SCANDAL!!!
.
It’s politics. Did you think our political press was going to cover anything substantial about AIG’s undercapitalized reinsurance contracts or the systemic risks posed by their life insurance business? You know, the sort of knowledge citizens might find useful while participating in a 21st Century democracy. Fagetaboutit.

sqr1, these bonuses are like 1/10000 of the money we gave the company. I don’t want Geithner approving every purchase the company makes.
.
If your point is simply that it is more important to find out how and where the money is spent, I completely agree.
.
And if your point is that SOME PEOPLE, particularly Republicans, are happy to let Democrats battle between Dodd an Geithner as to who is responsible for the bonuses, in order to distract from the larger issues, I also agree.
.
But if your point is that this is, in fact, unimportant, I couldn’t disagree more. AIG is an epicenter for the entire financial crisis. It is of paramount concern to determine who, if anyone, at AIGFP is absolutely essential to retain to wind down the business. Who has key information necessary to fixing the situation? Who is hopelessly compromised? Who may have funneled money offshore? Who should be prosecuted? Who must be kept from moving to AIGs counterparties? Who can and would use information obtained at AIG to engage in possibly illegal trades that might further destabilize the economy?
.
Tim Geithner’s statements tell me that — at best! — he couldn’t care less about any of the above questions.
.
Again, the bonus issue is the canary in the coal mine. When the canary dies, the coal miners don’t say, “Who cares? The canary is only worth 1/10000000 of the coal in the mine.”

SZ
.
Question: In theory what could Geitner have done to stop the bonuses?

Michael Scherer:
.
Thank you very much for responding to commentary; it is greatly appreciated.
.
Massimo’s Fed source gave information that was subsequently confirmed by Treasury
.
I’m sorry, I’ve re-read the thing twenty times, and I still can’t find the name of anybody at Treasury who confirmed anything.
.
Massimo mentions something about “A Treasury Department source, speaking on background, confirmed the e-mail memo…“, but that’s getting another anonymous person to confirm something claimed by the first one.
.
Why is the “Treasury Department Source” on background? Why is this person’s testimony believable in the slightest?
.
This un-named, unaccountable “source” goes on to…you guessed it: blame underlings!
.
“The Treasury Department official says the fault appears to lie with career staffers at the department who failed to report the imminent bonus deadline up the chain to Geithner. ”
.
Oh, really? Why is that any more believable?
.
“This failure may be a by-product of the difficulty Geithner has had staffing up at Treasury.”
.
It “may be”, or it “may be” that it’s related to something entirely different, or that it isn’t the case at all. Did Massimo do something to independently confirm anything that these people said other than checking with some different people? Why didn’t Massimo actually provide contents of both the Feb. 28 memo and the March 9 memo? Has he actually seen these documents? Does he know personally that they exist? More importantly, do we know? We’re not dealing in probabilities here –either we do or do not know that things are the case. Writing about what we do know is reporting; writing about what un-named people say about the contents of documents that may or may not exist is not reporting. How is this sort of piece not the height of irresponsibility? Do they teach you in J-school that this is the kind of work is what you should aspire to produce?
.
J-school standards aside, it seems that your threshold for believability is in Clarence the Angel talking to George Bailey-ville, instead of Dashiell Hammet-burg. For somebody as hard-boiled as yourself, it’s surprising how much faith you have in the credibility of other human beings, i.e. other reporters.
.
Your standards with respect to the credibility of these participants seem incredibly low, Michael Scherer, for somebody who seems as savvy as you appear to be. Until we all get to read names and see memos, none of this is reporting; all of it is the uncritical stenography of gossip.

Sorry, that should read “Do they teach you in J-school that this is the kind of work that you should aspire to produce?“

SG:
.
Question: In theory what could Geitner have done to stop the bonuses?
.
…we HAVE effectively nationalized AIG. Liddy was hand picked by Bush to lead AIG and the leadership that was there was fired and we own 80% of the company.
.
Well, according to your theory, SG, Geithner could have stopped the bonuses at any time, since we “effectively nationalized” AIG.
.
…Or perhaps your definition of “effective” is different than mine.
.
Either one or the other is the case, SG.
.
Either we “HAVE nationalized”, in which case Geithner is in total control of AIG down to its bonus payments, or we have not actually nationalized the firm, in which case there is nothing that Geithner can really do about how AIG spends its money, except perhaps to let Congress try to legislate executive management month in and month out –which is my point.

Good news. The company the taxpayers own 80% is suing us for back tax money we apparently didn’t give them. 306 million. Wheeeeee!

SZ
.
Yeah we DEFINITELY have different definitions of nationalized. I for one wouldn’t want the Treasury Secretary running every single failing institution. But having said that even if Geitner was the end all be all what you are saying is that he could just abrogate a contract. Thats bullsh*t whether we like it or not. He could try to negotiate it down or he could fire those who were getting them but he couldn’t block the bonuses that were entered into over a year ago. Thats unconstitutional, period. And the truth is the bill that the House passed is unconstitutional too. Whats going to happen if it passes is we will end up spending substantially more than 170 million to fight a court case that we are going to lose and still end up paying the bonuses. Thats not a satifisfying thought but it IS the truth. As much outrage as I have over the bonuses I still realize that there was little to nothing we could have done about them. Even if the language of Dodd’s amendment would have stayed the same it would still be true. It makes for great kabuki theater though and chest pounding doesn’t it?

sg,
-
We need to get over this fear of nationalization. Will it hurt the world economy and ours, yes! Is it necessary or will we the tax-payer keep paying off the counter-party risk?
-
See here: http://www.huffingtonpost.com/jeffrey-feldman/aig-counter-party-payment_b_176958.html

MS,
-
Once again, this is sensational journalism. It is watch the shiny little object stuff. The real issue here is that we have Zombie banks who we have effectively nationalized under Bush but for some unknown God-forsaken reason we have failed to take charge of???
-
Now, let us go deeper. Could it be because the U.S. government is afraid that if they did take over and were forced to show the insolvency other governments would get destabilized for trusting counter-party risk to a private entity, AIG, which essentially has the backing of the full faith and credit of the U.S. government?
-
Dig deeper!! Your analysis is shallow and vapid. It spouts the obvious and seeks hits rather than compelling insight on how to get us out of the ditch.
-
See here: http://www.huffingtonpost.com/jeffrey-feldman/aig-counter-party-payment_b_176958.html

SG:
.
Yeah we DEFINITELY have different definitions of nationalized.
.
No, we have different definitions of “effective”.
.
if Geitner was the end all be all what you are saying is that he could just abrogate a contract
.
Of course, I’m not making a statement as imprecise as “Geitner was the end all be all“.
.
I’m pointing out the fact that, if AIG were literally nationalized, part or all of its Financial Products apparatus could be placed in bankruptcy or near-bankruptcy reorganization proceedings, at which point the bonus-recipients’ contracts quite legally go way, way to the back of the creditor line in terms of disbursement of the firm’s assets.
.
It makes for great kabuki theater though and chest pounding doesn’t it?
.
It does, but its real significance is in the fact that it exposes an enormous, Rumsfeld-esque mistake in the thinking of Geithner and Summers about what needs to happen in order to overcome the crisis. That flaw –their assumption that the interests of financial institutions like AIG and its counterparties are identical to the government’s and the country’s — is apparent in the scandal, no matter how petty the press corps’ focus is. It’s apparent that the institutions will simply take our money and protect their own interests at the expense of ours.

MOSS: I don’t got to listen to this sh–.
.
BLAKE: You certainly don’t, pal! ‘Cause the good news is, you’re fired! The bad news is, you’ve got – all you’ve got – just one week to regain your jobs starting with tonight! Starting with tonight’s sit!

SG: I don’t think you fully grasp the situation at AIG. It is a company that is insolvent without the massive infusion of cash provided by the U.S. taxpayers. We’re not talking about just a cash flow problem. Liabilities exceed assets. Without government intervention of some form, it would go bankrupt.
.
Now, do you understand what happens in a bankruptcy proceeding? Again, liabilities exceed assets. It is pointless to talk about the sanctity of contracts when there isn’t enough money to go around to pay off all the creditors. In a bankruptcy proceeding, there is priority. Now where do you think employment bonuses fall in terms of priority? If you guessed “at the bottom” then you are correct. Bonuses are the toxic asset tranche in a bankruptcy proceeeding
.
In short, back when Geithner was at the NY Fed and negotiated the bailout, he could have said “You’re all fired. The company is bankrupt. Now, if you want to keep your job, sign this compensation renegotiation agreement. You don’t like it? Walk, bi-ch.”
.
That’s what Paulson told the UAW workers when the auto companies got TARP funds. “Renegotiate your union contracts or find out how much you get from a bankruptcy judge after you all lose your jobs and your plant’s assembly lines are sold for scrap metal.”

Above quote from Glenngary Glenn Ross.
.
Also, the cost of “nationalizing” insolvent corporations is next to nothing compared to the cost of bailing them out. They are basically worthless, so buying them up is not terribly expensive unless you deliberately overpay in order to bailout shareholders.

sqr1
.
Here is what I don’t think YOU understand about AIG. There major liabilities are to banking institutions here and abroad for which they underwrote many risky investments. Yeah it would be GREAT in theory to send AIG to bankruptcy, except for the pesky little fact that it would quite literally bring down the banking system here and many places overseas. Besides that there are parts of AIG that are actually profitable like the life insurance sector which would then lose fair value in a bankruptcy proceeding. Again it sounds good just to fire everybody or nationalize or let them fail but it really isn’t practical unless you want to live in a country with no banks and no credit lending. Do I think people in the FP division should be fired? Of course, but guess who that falls on. Edward Liddy thats who, not Tim Geitner. We don’t have enough money to nationalize all the big banks and nothing anybody could have done would have broken the bonus contracts. Even if fired they would have been entitled to that money. It is what it is whether we like it much or not.

sqrl
In short, back when Geithner was at the NY Fed and negotiated the bailout, he could have said “You’re all fired. The company is bankrupt. Now, if you want to keep your job, sign this compensation renegotiation agreement. You don’t like it? Walk, bi-ch.”
.
Can you give me links that back up how much Geithner influenced the bailout? Was he the main decider?

“In short, back when Geithner was at the NY Fed and negotiated the bailout, he could have said ‘You’re all fired. The company is bankrupt. Now, if you want to keep your job, sign this compensation renegotiation agreement. You don’t like it? Walk, bi-ch.’”
.
This presumes that Wall Street answers to government, rather than the other way ’round. None of us have any idea what Obama was threatened with by these miscreants if they decided to make the owners take the hit.

SG:
.
Yeah it would be GREAT in theory to send AIG to bankruptcy, except for the pesky little fact that it would quite literally bring down the banking system here and many places overseas.
.
I don’t think that you understand the issue, quite frankly, because you seem to keep misrepresenting in your replies the proposals being discussed.
.
To help me better comprehend your argument, can you tell me where you’ve obtained this knowledge with respect to the “banking system”?
.
How do you know that placing all or parts of “AIG to bankruptcy…would quite literally bring down the banking system here and many places overseas“?
.
Apart from Obama Administration officials asserting the possibility of this scenario, what other sources to which you have access are creating such certainty in your mind? Can you link to them, please?
.
Are you simply paraphrasing cable news conventional wisdom?

This week’s cover story in Time magazine is about AIG. There is also a story in the magazine about the teenage birthrate in this country. It is an eye opening report, when one reads it, to the extent that, your so called socially morale conservative southern states have a teen birthrate twice that of your so called socially immoral liberal northern states. Now, how would one explain that? Getting to the AIG story, my wife has worked for AIG for over twenty five years, she received her bonus two days ago. She said to me after I asked her if she was going to give it back, and I quote. “They would have to pry it from her cold dead hands”. Now, conservatives should be able to appreciate talk like that.

sg: Obviously — as I already said — I do not want to send AIG into bankruptcy. Having said that, the government is in the driver’s seat here.
.
First, if the Treasury Department wanted to it could state its intention to honor some or all of AIG’s obligations even if bankruptcy occurred. Just like the government did with Fannie Mae although it was under no legal obligation to do so. Doing so, in a prudent manner, could alleviate much of the market fallout from putting AIG into bankruptcy.
.
Second, Edward Liddy was hand-picked by Geithner. It is a little absurd to say that this is up to Liddy. An agreement on how AIG would be restructured, who would be retained, and how the division would be wound down should have been all part of any decision to pick a new CEO.
.
Third, my point isn’t that AIG should have been put into bankruptcy. That would have been a less preferable option. My point is that the U.S. government had many, many, many tools at its disposal. Some of those tools would have permitted putting AIG into bankruptcy without triggering the global financial collapse of which you apparently fear. Meanwhile, the shareholders of AIG and the idiots in AIGFP were holding a busted hand. We could have offered pennies on the dollar, take it or leave it. What were they going to do? Sue us?!? Please, bring it on. Finally, money well spent.
.
Fourth, many of the counterparties to AIG are accepting TARP money (or the foreign equivalent). They too need us, the taxpayer, more than we need them. The Treasury Department could have made TARP funds conditional upon renegotiating many of the CDS deals. Hell, even creditors who didn’t accept TARP funds would gladly accept a discount from an insolvent company rather than try to extract money through bankruptcy proceedings. Paulson and Geithner chose to nopt negotiate favorable terms.
.
Fifth, I do not want the U.S. government to own AIG at all. Unfortunately, it now does. And as long as taxpayers do own AIG, I will insist that our interests be protected. Any private investor in a troubled corporation would do the same. The time to discuss the wisdom of “nationalization” was before we handed over the cash.

carotexas1: Google is your friend.

This presumes that Wall Street answers to government, rather than the other way ’round. None of us have any idea what Obama was threatened with by these miscreants if they decided to make the owners take the hit.
.
You are correct. And I choose not to speculate about matters about which “None of us have any idea.”

sqrl:
.
Can you give me links that back up how much Geithner influenced the bailout? Was he the main decider?
.
Google is your friend.
.
That’s a perfectly reasonable request, sqrl.
.
How do you know that this is the case?

Here is some reporting on Geithner’s role in the bailout:
.

Barring last minute changes, the nominee for Treasury Secretary will be NY Fed President Tim Geithner — a career Treasury official under both Bob Rubin and Larry Summers — who actually had worked at the Treasury in three administrations under five Secretaries — going back to 1988.

Geithner has been a key player in the current economic crisis — helping Treasury Secretary Hank Paulson and his team manage the wall street bailout.

.
Granted, it’s crappy reporting, but that’s what I’ve come up with so far…

What sank AIG in the end was another credit downgrade. Cassano had written so many CDS deals that when the company was facing another downgrade to its credit rating last September, from AA to A, it needed to post billions in collateral — not only more cash than it had on its balance sheet but more cash than it could raise even if it sold off every single one of its liquid assets. Even so, management dithered for days, not believing the company was in serious trouble. AIG was a dried-up prune, sapped of any real value, and its top executives didn’t even know it.
.
On the weekend of September 13th, AIG’s senior leaders were summoned to the offices of the New York Federal Reserve. Regulators from Dinallo’s insurance office were there, as was Geithner, then chief of the New York Fed. Treasury Secretary Hank Paulson, who spent most of the weekend preoccupied with the collapse of Lehman Brothers, came in and out. Also present, for reasons that would emerge later, was Lloyd Blankfein, CEO of Goldman Sachs. The only relevant government office that wasn’t represented was the regulator that should have been there all along: the OTS.
.
“We sat down with Paulson, Geithner and Dinallo,” says a person present at the negotiations. “I didn’t see the OTS even once.”
.
On September 14th, according to another person present, Treasury officials presented Blankfein and other bankers in attendance with an absurd proposal: “They basically asked them to spend a day and check to see if they could raise the money privately.” The laughably short time span to complete the mammoth task made the answer a foregone conclusion. At the end of the day, the bankers came back and told the government officials, gee, we checked, but we can’t raise that much. And the bailout was on.
.
http://www.rollingstone.com/politics/story/26793903/the_big_takeover/5

“And I choose not to speculate about matters about which “None of us have any idea.”
.
Exactly. We also have no idea why the administration has done (or not done) whatever any of us think they should have done (or not done). It’s all speculation.

I would add that AIG’s senior executives and board members owe a fiuduciary duty to the shareholders. If the NY Fed and the Treasury Department had proposed an arrangement that included renegotiating AIG’s compensation structure that would salvage some value to AIG’s shareholders, and if the alternative was almost certainly wiping out AIG’s shareholders through bankruptcy, and if AIG’s senior management rejected the proposal because they personally would benefit from the existing compensation agreements, then I would argue that management would be breaching their fiduciary duty and could be liable for the resulting shareholder losses.
.
For some reason, we the taxpayers are supposed to be terrified of lawsuits — lawsuits! Call me crazy, but I’m more than happy to let the a-holes in AIGFP spend their bonus money on expensive lawyers.

sqrl:
.
Were you paraphrasing that Rolling Stone story, or did you have another source?

“…I would argue that management would be breaching their fiduciary duty and could be liable for the resulting shareholder losses.”
.
And after perpetrating the greatest financial fraud in history and very nearly crashing the global economy, “breaching their fiduciary duty” should really get them in hot water.

Thank you Stuart and Gunny.
.
I know Geithner was present at the original bailout but I am wondering just how much he had to do with the final decisions. I thought that Paulson was in charge and if Geithner did have any dissenting opinions would they have been accepted if it was not what Paulson wanted. I know that at the time that President Bush did not really want to do this as it was against his ideology.

In lieu of SG:
.
Here’s an argument against any sort of bankruptcy or near-bankruptcy given by a cogent commenter at TPM:
.

The problem that the Lehman Brother’s bankruptcy exposed is that, in these complex derivative investments, it’s not always clear where the counterparty risk lies. These transactions are non-traditional in structure and so its often not clear how bankruptcy rules will apply to them. There’s very little relevant case law and these transactions just weren’t designed with much thought toward this contingency (no one imaged that these large couterparties could ever fail). Things don’t fit neatly into statutory boxes, so it’s not clear what the bankruptcy court will do and who will end up getting their money back. So when Lehman went bankrupt, everyone had to try to assess the degree to which they were exposed to the potential bankruptcy of other major counterparties. And that’s really hard to do with any accuracy. That’s why everything froze up. No one could get an accurate assessment of their own exposure.
.
The fear people have now–and justifiably so, I think–is that the only thing keeping the financial system functioning at all right now is the assumption that the major governments of the world will not allow any other major counterparties to default. If even one of them is allowed to fail, that assumption immediately goes out the window and suddenly everyone will have to assume that any major counterparty could fail at any moment. If that happens, everything will grind to a hault again.

.
Of course, the obvious flaw in that argument is that nothing can then be done about that grave uncertainty, because if nothing can ever proceed without any sort of ruling, then we’re still in the situation where nobody knows what the risks really are, and every incentive still exists to hide those risks. It’s precisely because of continuing uncertainty that we’re in the mess we’re in. If nobody is empowered to make a rational determination as to the value of these counterparties’ claims, then we’re just delaying and adding hundreds of billions more to the cost of maintaining not knowing.

shep: I totally support investigating and prosecuting securities fraud. While civil litigation for breach of fiduciary duty may seem like small potatoes, I merely mention it to observe that the threat of lawsuits is a two-way street.
.
carotexas1: I didn’t mean to be snarky. I don’t have any links at my fingertips. But I suspect that if you use google news to search for info from back in September you’ll find a bunch of stories that basically say that after Lehman failed and nearly triggered a total panic, Paulson and Geithner worked to bail out AIG. I haven’t read anything to indicate that there was any daylight between Paulson and Geithner. Nor have I seen any indication that Geithner took particular pains to root out either the people or the practices at AIG that led to the mess.

“While civil litigation for breach of fiduciary duty may seem like small potatoes, I merely mention it to observe that the threat of lawsuits is a two-way street.”
.
I didn’t mean to belittle your specific charge or methodology, just the idea of elite accountability. Not bloody likely.

StuartZ,
-
Your analysis completely spot on. The fact is that AIG FP by some estimates held or made 20% of the CDS market that exploded from $98 billion to $72 Trillion from 2001 – 2007. AIG made those contracts so that they existed as a legal fiction outside of insurance regulations. They had few if any loss provisions set aside. Now, they are potentially on the hook for TRILLIONS, yes, with a T of money to Uncle Sam, Aunt Jane, Cousin Sara, the French, Saudis, Germans, Russians and even our biggest creditor the Chinese!!
-
In addition, many of our Congress men and women are insured or have substantial assets or received campaign assistance (and this is being kind) from AIG and many of their financial brothers and sisters. There is a reason we have not nationalized AIG. And why they were scared after Lehman failed.
-
1) Nobody, and I mean NOBODY KNOWS just how much counter-party risk exists. We have NO clue. If someone says they do, they are either dishonest, ignorant or stupid.
.
2) When your biggest creditors have risks which were INSURED (let’s use the right term here) by your biggest insurance company who could very well be INSOLVENT (Read: BANKRUPT!), you might have a problem. [understatement of century]
.
3) When your Government is in bed with the very folks that they should have been regulating. It is akin to permitting a sex offender to rome an amusement park! The consequences are perverse!

Sg,
-
You stateed: “Yeah it would be GREAT in theory to send AIG to bankruptcy, except for the pesky little fact that it would quite literally bring down the banking system here and many places overseas.”
-
How do you know this? Further, if they are in such a deep hole already aren’t we already in the quick sand and just doing more wiggling when we need a rope or some sort of life-line?

bryan: In fairness, “insurance” isn’t the right word here. Indeed, AIG has vigorously opposed treating CDS guarantees like insurance precisely so they could avoid the appropriate regulations.
.
And because it wasn’t insurance, and because AIG’s counterparties should have done their due diligence, our default position should be that the counterparties should bear the risk of AIG’s insolvency. I.e. we should only intervene when it is abundantly clear that the failure to do so would trigger some sort of financial cataclysm.
.
The uncertainty surrounding the AIG counterparties is another argument in favor of nationalizing all the insolvent banks. If the U.S. taxpayer is going to pour billions into AIG and then it is going to be sent directly to Citi or Goldman or whomever…for God’s sake, let those institutions be nationalized so that we are paying ourselves rather than reckless bankers. If it is going to a foreign bank…make the central bank for that country shoulder at least part of the bailout.
.
One of the things that annoyed me about the idea of AIG “giving back” in TARP funds an amount equal to the bonuses paid out is that it sounds like the money isn’t needed. If AIG can afford to give it back, why is it being loaned in the first place?

Sqr1,
-
“And because it wasn’t insurance, and because AIG’s counterparties should have done their due diligence, our default position should be that the counterparties should bear the risk of AIG’s insolvency.”
.
You’re RIGHT. This was GAMBLING!! Insurance actually has a component of loss reserves.
-
I.e. we should only intervene when it is abundantly clear that the failure to do so would trigger some sort of financial cataclysm.
.
So, which of the foreign entity counter-parties do we save first? What do we do if it exceeds the capacity of government? How do we determine financial cataclysm?

So, which of the foreign entity counter-parties do we save first? What do we do if it exceeds the capacity of government? How do we determine financial cataclysm?
.
Honestly, those are questions that are beyond my capabilities to answer. All I know is that they are the right questions to be asking and I don’t see too many in the press or in the White House asking them.

This is not worth a cover story. The MSM needs to get a grip. It’s not enough for Obama and Geittner to accept responsibility for a mistake, we have to parse “what did they know and when did they know it”?????
.
No wonder the print media is going to hell in a hand basket.

sqr1:
.

The uncertainty surrounding the AIG counterparties is another argument in favor of nationalizing all the insolvent banks. If the U.S. taxpayer is going to pour billions into AIG and then it is going to be sent directly to Citi or Goldman or whomever…for God’s sake, let those institutions be nationalized so that we are paying ourselves rather than reckless bankers. If it is going to a foreign bank…make the central bank for that country shoulder at least part of the bailout.

.
Given that the FDIC has been “nationalizing” (EATEN) banks at a hugely accelerated rate ( as per this list of failed banks ), it’s pure folly to keep shoveling hundreds and hundreds of billions of dollars into the furnace, simply to keep alive the pretense that the big banks’ balance sheets have real numbers on them.

sqr1,
-
I don’t think that our media is equipped to handle that discussion. They can’t explain it nor do they want to do so. It would show that they were implicit in getting us to the point where we find ourselves today. Scherer and gang are beyond question just hacks. They spout an old line “what did you know and when did you know it” and call it journalism. It is NOT!
-
Intelligent discourse. Well-reasoned argument. Testing of theories and creation of postulates. Confirmation of source material. These are the talents of skilled men. What MS has done here is no favor. If I wanted to read unsubstantiated gossip, I would buy a National Enquirer and even that blind squirrel finds a nut once in a while (John Edwards story).

[...] http://swampland.blogs.time.com/2009/03/20/when-and-what-they-should-have-known/ [...]