NYT Digs Further Into the AIG Backdoor Bailout

Regulatory capture doesn't begin to describe what went on here

Just when you thought the AIG/Goldman Sachs backdoor bailout scandal couldn’t smell any fishier, The New York Times wades through 250,000 pages of a document dump and came out with a story showing in more detail how the government sold out taxpayers in order to secretly bail out giant banks.

Regulatory capture doesn’t really describe what happened here. It’s more like regulatory kidnapping.

The Times shows the Bush administration and the Federal Reserve Board of New York (under Obama’s Treasury Secretary Tim Geithner):

— Forced AIG to give up its right to sue the banks getting the backdoor bailout for any fraud they may have committed against the insurer

— Empowered a fresh-from-Goldman guy named Dan Jester to oversee the AIG bailout while allowing him to retain his (presumably substantial) Goldman shares [Goldman is an Audit funder]

— Rebuffed outside advisers’ plans to give the banks haircuts on what they were “owed,” which could have saved taxpayers $30 billion that instead went to pad Wall Street’s (and foreign banks’) bottom line (half of which gets paid out in bonuses and the like)

— Attempted—and succeeded for a couple of years—to cover all this up

This is business journalism at its best, and it’s no surprise to Audit readers that it’s Louise Story and Gretchen Morgenson who reported it. They’ve been responsible time after time for some of the most important journalism of the crisis.

Here, they quote a law professor, analyzing what this all means:

As a Congressional commission convenes hearings Wednesday exploring the A.I.G. bailout and Goldman’s relationship with the insurer, analysts say that the documents suggest that regulators were overly punitive toward A.I.G. and overly forgiving of banks during the bailout — signified, they say, by the fact that the legal waiver undermined A.I.G. and its shareholders’ ability to recover damages.

“Even if it turns out that it would be a hard suit to win, just the gesture of requiring A.I.G. to scrap its ability to sue is outrageous,” said David Skeel, a law professor at the University of Pennsylvania. “The defense may be that the banking system was in trouble, and we couldn’t afford to destabilize it anymore, but that just strikes me as really going overboard.”

“This really suggests they had myopia and they were looking at it entirely through the perspective of the banks,” Mr. Skeel said.

Story and Morgenson note, too, how very different this was from how the Bush administration handled the Chrysler bailout.

In that matter, the government told banks they could take losses on their loans or simply own a bankrupt company; the banks took the losses.

Chrysler didn’t have their former CEO in the Treasury Department, like Goldman had with Hank Paulson.
Yves Smith of Naked Capitalism says that:

Goldman, either as packager or as swap counterparty, was involved in 38.4% of the Maiden Lane transactions, plus had additional AIG exposure through seven Abacus trades

Felix Salmon of Reuters notes this gem from the actual waiver:

Each of AIG-FP and AIG Inc, for good and valuable consideration, the sufficiency of which it hereby acknowledges, forever releases the Counterparty from any and all Claims of any nature whatsoever that AIG-FP or AIG Inc ever had, now has or can, shall or may have, by reason of any matter, cause or thing occurring from the beginning for the world to the Termination Date that arises out of or in any way relates to the CDS Transactions.

Morgenson and Story are good to pull this email from the New York Fed, which shows how subservient our regulators are to the banks:

The New York Fed appointed Terrence J. Checki as its point man with the banks. In e-mail messages that November, he was deferential to bankers, including the e-mail message in which he thanked Mr. Blankfein for his patience.

After UBS, a Swiss bank, received details about the Fed’s 100-cents-on-the-dollar proposal, Mr. Checki thanked Robert Wolf, a UBS executive, for his patience as well. “Thank you for your responsiveness and cooperation,” he said in an e-mail message. “Hope the benign outcome helped offset any aggravation. Thank you again.”

It’s worth revisiting this Times story from Sunday that spells out just how much the pending financial-reform legislation relies on tough regulators to interpret how to enforce the law rather than telling them how to do it.

Story and Morgenson clearly show the pitfalls of that. They show how the government licked the banks’ boots at a time when the bankers were reeling—with no leverage. What do you think these internal discussions look like in better times, when the bankers are in full-steam-ahead mode?

Further Reading:

Goldman’s Backdoor Bailout: A call for transparency in the taxpayer rescue of Wall Street

The Press Angle of the Fed’s Backdoor-Bailout Cover-up: Geithner’s New York Fed responded to a FOIA by withholding more information

Audit Interview: Gretchen Morgenson. “You’ve got to keep hammering”

Audit Interview: Mark Pittman. “This is a defining moment for business journalism and for Wall Street.”

Bloomberg on AIG as Banks’ Backdoor Bailout

The New York Times’s Devastating Goldman Piece: Morgenson and Story unload on the bank’s conflicted business model

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.