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Shh, it's a secret
Jan. 7th, 2010 02:55 pmIt's not looking good for Geithner. Emails between the Federal Reserve Bank of New York and AIG show that FRBNY told AIG to keep from the public details of AIG's payments to banks to "commute" various derivatives.
As you may recall I said at the time, it struck me as odd that AIG would pay 100 cents on the dollar to retire debt that they could probably have got rid of for 60 cents on the dollar, if only it had not become clear that the US government considered AIG "too big to fail". Since the major (some would say, the only) threat you can put to people when you ask them to accept less than you actually owe them is to say "look, if you don't take this, you may well get nothing", for the FRBNY and the US government to admit that AIG would not be allowed to fail is to take away your major (some would say, only) negotiating card.
Having realized that they had totally ballsed it up on the negotiating front (costing the US taxpaper something in the region of $13bn, but making various US and European institutions considerably richer than they had expected to be at the start of the year) the New York Fed told AIG to cross out a reference to this in a regulatory filing that was sneaked out on December 24 2008.
As Bloomberg writestoday:
The details of the payments finally came out in a so-called Schedule A release in March 2009.
Bloomberg broke this story in October 2009, even though the act of overpayment had been public knowledge for some time. Californian politician Darrell Issa has wheedled out the email exchanges between FRBNY and AIG at this time, and they clearly make bad reading for Geithner. To be a dreadful negotiator is bad enough, but to try to keep it a secret could be considered even more heinous.
By now the SEC and the FRBNY were at war with each other on what AIG should disclose. By March last year an AIG deputy counsel wrote in an email that to follow the FRBNY's desires would necessitate a number of shenanigans about which AIG itself (let alone the SEC) was not happy.
For about four months (from November 2008 to March 2009) the FRBNY seemed desperate to keep a lid on something which they should have known they could not keep secret for long. But what remains a mystery (at least to me) is the actual causation. Was it, as some have speculated "a backdoor bailout"? In other words, did FRBNY know that its actions would force AIG to compensate the banks at 100 cents on the dollar, and that this would prevent another Lehman-style collapse without actually looking as if the US government was pumping billions of dollars into the banks? Or was it just plain incompetence on the part of the FRBNY, which consisted of too many bureaucrats who had no idea how to play hard ball in the cut-throat bluff-and-double-chicken world of distressed debt negotiation? My hunch is the latter.
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As you may recall I said at the time, it struck me as odd that AIG would pay 100 cents on the dollar to retire debt that they could probably have got rid of for 60 cents on the dollar, if only it had not become clear that the US government considered AIG "too big to fail". Since the major (some would say, the only) threat you can put to people when you ask them to accept less than you actually owe them is to say "look, if you don't take this, you may well get nothing", for the FRBNY and the US government to admit that AIG would not be allowed to fail is to take away your major (some would say, only) negotiating card.
Having realized that they had totally ballsed it up on the negotiating front (costing the US taxpaper something in the region of $13bn, but making various US and European institutions considerably richer than they had expected to be at the start of the year) the New York Fed told AIG to cross out a reference to this in a regulatory filing that was sneaked out on December 24 2008.
As Bloomberg writestoday:
The e-mails span five months starting in November 2008 and include requests from the New York Fed to withhold documents and delay disclosures. The correspondence includes e-mails between AIG’s Shannon and attorneys at the New York Fed and its law firm, Davis Polk & Wardwell LLP. ... According to Shannon’s e-mails, the New York Fed suggested that AIG refrain in a filing from mentioning so-called synthetic collateralized debt obligations.
The filing “reflects your client’s desire that there be no mention of the synthetics in connection with this transaction,” Shannon wrote to Davis Polk on Dec. 2, 2008. “They will not be mentioned at all.”
The details of the payments finally came out in a so-called Schedule A release in March 2009.
Bloomberg broke this story in October 2009, even though the act of overpayment had been public knowledge for some time. Californian politician Darrell Issa has wheedled out the email exchanges between FRBNY and AIG at this time, and they clearly make bad reading for Geithner. To be a dreadful negotiator is bad enough, but to try to keep it a secret could be considered even more heinous.
By now the SEC and the FRBNY were at war with each other on what AIG should disclose. By March last year an AIG deputy counsel wrote in an email that to follow the FRBNY's desires would necessitate a number of shenanigans about which AIG itself (let alone the SEC) was not happy.
For about four months (from November 2008 to March 2009) the FRBNY seemed desperate to keep a lid on something which they should have known they could not keep secret for long. But what remains a mystery (at least to me) is the actual causation. Was it, as some have speculated "a backdoor bailout"? In other words, did FRBNY know that its actions would force AIG to compensate the banks at 100 cents on the dollar, and that this would prevent another Lehman-style collapse without actually looking as if the US government was pumping billions of dollars into the banks? Or was it just plain incompetence on the part of the FRBNY, which consisted of too many bureaucrats who had no idea how to play hard ball in the cut-throat bluff-and-double-chicken world of distressed debt negotiation? My hunch is the latter.
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