Thursday's Wall Street Journal's staff editorial reminded us of yet another excuse being offered by then-NY Fed president, now Treasury Secretary, for directing AIG to pay 100% on its credit default swap obligations. Prior posts, here, here and here, have addressed this puzzling aspect of the AIG affair, and earlier Geithner attempts to evade criticism for this action.
First, we were told it was to prevent a systemic meltdown of the US financial sector due to swaps failing to settle.
Then, it was explained that all counterparties had to be treated equally, and some French executives would be imprisoned if forced to accept less than a 100% payout on their swaps. So Geithner blinked and agreed to the full payments.
Somewhere in the confusion since last fall, Geithner suggested that AIG was "too big to fail."
Now, the Journal reports Geithner's latest excuse. He was concerned about AIG's credit rating!
The Treasury Secretary testified that the state-supervised insurance businesses of AIG were, in fact, subject to failure from the effects of the financial products unit's swaps troubles. Further, Geithner said,
"the people responsible" for AIG's insurance unit regulation "had no idea" of the risks the company was facing.
The Journal editorial correctly notes that this is essentially the complete opposite of what state regulators, including Eric Dinallo, former NY state insurance regulator, believed. And that it's a very different story to explain the AIG swap payments as necessary to maintain AIG's credit rating, for the benefit of its many insurance businesses.
This latest excuse rings false. As the editorial observes, when the US government owns 80% of you, nobody will worry about your credit lines.
The real concern arising from Geithner's ever-shifting reasons for the AIG full swaps payments is that each one portends different problems in the US financial services sector, different regulatory issues and potential solutions.
If Geithner can't keep his excuses straight, how can Congress possibly author a responsible, effective reform of regulation for the sector?
It's neither an academic question, nor a funny one. This is serious. We can't even learn what the primary actors in the sad story of AIG's takeover truly thought was the major risk, and why.
The editorial points out the very major question Geithner's latest excuse implies. That is, is our entire state-based regulatory approach to insurance flawed? Or is Geithner simply grasping at excuses in order to evade responsibility for a bone-headed, expensive, unnecessary and ill-advised action?
How can there be productive forward movement for the financial sector from the recent financial crisis if we can't even pin down simple things, like why the Fed behaved toward and with AIG as it did?
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