WASHINGTON: The New York Federal Reserve under Timothy Geithner failed to exhaust all options to arrange a private-sector rescue of American International Group before launching a taxpayer-funded bailout in 2008, a government watchdog group said on Thursday, June 10.
A report by the Congressional Oversight Panel said Geithner, now US Treasury Secretary, on Sept 15, 2008 left the task of finding a private bailout for AIG to two Wall Street banks, JPMorgan Chase and Goldman Sachs Group.
Within hours, the firms had concluded no private sector deal was possible.
"The Panel is concerned that the government put the effort to organize a private AIG rescue in the hands of only two banks ' banks with severe conflicts of interest as they would have been among the largest beneficiaries of a taxpayer bailout," the report said. "By failing to bring in other players, the government neglected to use all of its negotiating leverage."
The report is the latest salvo in a barrage of criticism of the Fed's and Treasury's handling of the AIG bailout from government auditors and US lawmakers in recent months.
The rescue, prompted by billions of dollars in cash calls from credit default swaps that AIG sold during the housing boom, was the costliest of the financial crisis at about US$182 billion.
The Fed and Treasury have argued that days after the failure of Lehman Brothers, they had little choice but to rescue AIG with taxpayer funds. Markets were in a panic and an uncontrolled AIG bankruptcy would have gutted the global financial system.
The panel's report said that New York Fed officials allowed precious days to go by in September 2008 when they knew AIG had severe liquidity problems. Robert Willumstad, then-AIG CEO, spoke to Geithner in July about accessing the Fed's discount loan window, which was available to primary dealers, but not insurers.
Willumstad asked Geithner again on Sept 9 about how to become a primary dealer for Fed lending access. And AIG informed the Fed it was having severe liquidity problems on Sept 12, at a time when Geithner and then-Treasury Secretary Henry Paulson were focused on trying to rescue Lehman.
"The government could have acted earlier and much more aggressively to secure either a fully private rescue of AIG or a rescue that combined public and private funds," the panel's chairman, Harvard Law School professor Elizabeth Warren, told reporters on a conference call.
"This would have been difficult, perhaps even impossible, but the government should have exhausted every option before spending a penny of taxpayer funds."
Deepening hole
Fed officials contend that AIG, which they did not regulate, did not fully inform them of the depth of the company's hole until the morning of Sept 15, the day before Geithner approved an $85 billion Fed loan for AIG, the first of several such installments.
Treasury spokesman Andrew Williams, who also worked at the New York Fed in September 2008, said it was easy for the panel to speculate about different outcomes for the AIG rescue.
"But the laundry list of ideas, however creative, overlooks the basic fact that the global economy was on the brink of collapse and there were only hours in which to make critical decisions," he said.
"The choices and tools available to the government were extremely limited, and outcomes were deeply uncertain."
A Fed spokesperson said the bank disagreed with the report's conclusion that there were "...better alternatives that were workable in the extreme circumstances of the time", and it believes its actions were necessary to protect Americans from the "catastrophic consequences" of an AIG failure.
The report also concluded that the AIG rescue, and the subsequent payment-in-full to Wall Street and international banks to cancel credit default swaps they had bought from AIG, had vastly increased moral hazard in the financial system.
It said this had fundamentally distorted derivatives markets by implying that such risky swaps bets would be transformed into "fully guaranteed transactions, with the American taxpayer standing as guarantor".
Saving more foreign banks
The oversight panel also concluded that in addition directly paying billions to banks such as Goldman and Societe Generale, US taxpayers also had indirectly saved other foreign banks from financial difficulties by keeping AIG alive.
The AIG rescue preserved some $249.9 billion in non-cancelled regulatory capital swaps with foreign banks that were active as of Oct. 1, 2008, the panel said, citing non-public AIG documents.
The largest of the counterparties for these transactions was ABN AMRO, with $56 billion in such swaps. Had AIG failed, the loss of credit protection for the nationalized Dutch bank would have left it needing to raise $3.6 billion in additional regulatory capital, the report said.
Among other banks holding such AIG swaps were Denmark's Danske Bank at $32.2 billion; Germany's KfW, withe $30.0 billion; and France's Credit Logement at $29.3 billion; Calyon; BNP Paribas at $23.3 billion and Societe Generale at $15.6 billion. ' Reuters
A report by the Congressional Oversight Panel said Geithner, now US Treasury Secretary, on Sept 15, 2008 left the task of finding a private bailout for AIG to two Wall Street banks, JPMorgan Chase and Goldman Sachs Group.
Within hours, the firms had concluded no private sector deal was possible.
"The Panel is concerned that the government put the effort to organize a private AIG rescue in the hands of only two banks ' banks with severe conflicts of interest as they would have been among the largest beneficiaries of a taxpayer bailout," the report said. "By failing to bring in other players, the government neglected to use all of its negotiating leverage."
The report is the latest salvo in a barrage of criticism of the Fed's and Treasury's handling of the AIG bailout from government auditors and US lawmakers in recent months.
The rescue, prompted by billions of dollars in cash calls from credit default swaps that AIG sold during the housing boom, was the costliest of the financial crisis at about US$182 billion.
The Fed and Treasury have argued that days after the failure of Lehman Brothers, they had little choice but to rescue AIG with taxpayer funds. Markets were in a panic and an uncontrolled AIG bankruptcy would have gutted the global financial system.
The panel's report said that New York Fed officials allowed precious days to go by in September 2008 when they knew AIG had severe liquidity problems. Robert Willumstad, then-AIG CEO, spoke to Geithner in July about accessing the Fed's discount loan window, which was available to primary dealers, but not insurers.
Willumstad asked Geithner again on Sept 9 about how to become a primary dealer for Fed lending access. And AIG informed the Fed it was having severe liquidity problems on Sept 12, at a time when Geithner and then-Treasury Secretary Henry Paulson were focused on trying to rescue Lehman.
"The government could have acted earlier and much more aggressively to secure either a fully private rescue of AIG or a rescue that combined public and private funds," the panel's chairman, Harvard Law School professor Elizabeth Warren, told reporters on a conference call.
"This would have been difficult, perhaps even impossible, but the government should have exhausted every option before spending a penny of taxpayer funds."
Deepening hole
Fed officials contend that AIG, which they did not regulate, did not fully inform them of the depth of the company's hole until the morning of Sept 15, the day before Geithner approved an $85 billion Fed loan for AIG, the first of several such installments.
Treasury spokesman Andrew Williams, who also worked at the New York Fed in September 2008, said it was easy for the panel to speculate about different outcomes for the AIG rescue.
"But the laundry list of ideas, however creative, overlooks the basic fact that the global economy was on the brink of collapse and there were only hours in which to make critical decisions," he said.
"The choices and tools available to the government were extremely limited, and outcomes were deeply uncertain."
A Fed spokesperson said the bank disagreed with the report's conclusion that there were "...better alternatives that were workable in the extreme circumstances of the time", and it believes its actions were necessary to protect Americans from the "catastrophic consequences" of an AIG failure.
The report also concluded that the AIG rescue, and the subsequent payment-in-full to Wall Street and international banks to cancel credit default swaps they had bought from AIG, had vastly increased moral hazard in the financial system.
It said this had fundamentally distorted derivatives markets by implying that such risky swaps bets would be transformed into "fully guaranteed transactions, with the American taxpayer standing as guarantor".
Saving more foreign banks
The oversight panel also concluded that in addition directly paying billions to banks such as Goldman and Societe Generale, US taxpayers also had indirectly saved other foreign banks from financial difficulties by keeping AIG alive.
The AIG rescue preserved some $249.9 billion in non-cancelled regulatory capital swaps with foreign banks that were active as of Oct. 1, 2008, the panel said, citing non-public AIG documents.
The largest of the counterparties for these transactions was ABN AMRO, with $56 billion in such swaps. Had AIG failed, the loss of credit protection for the nationalized Dutch bank would have left it needing to raise $3.6 billion in additional regulatory capital, the report said.
Among other banks holding such AIG swaps were Denmark's Danske Bank at $32.2 billion; Germany's KfW, withe $30.0 billion; and France's Credit Logement at $29.3 billion; Calyon; BNP Paribas at $23.3 billion and Societe Generale at $15.6 billion. ' Reuters
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