At the end of last month, John Cochrane wrote a great editorial in the Wall Street Journal entitled Geithner's Global Central Planning. I wrote about it here. So Geithner & Co.'s nonsensical ideas about global trade central planning, in concert with exchange rate management, is not news.
Never the less, Geithner recently wrote another defense of these bad ideas in the Journal. It was the same basic set of themes, i.e., set balance of trade flow targets, get other countries to appreciate their currencies so the US can depreciate its dollar.
Cochrane exposed them as stupid and unfounded theories then, and nothing has changed about his critique in the past three weeks.
However, there's a deeper issue here, as well. That is the question of Geithner's credibility. As I have written in prior posts, there's nothing in Geithner's background to suggest that he is anything but a financial systems plumber. When he's had a significant policy-level position, such as running the New York Fed, he botched the job. Remember, in that capacity, he let himself be out-maneuvered by Goldman Sachs and a couple of French banks, resulting in his using taxpayer dollars to fully repay those parties for their AIG exposure.
I don't recall Geithner authoring oft-cited, learned papers concerning international trade theory. Or theories of currency policy and management.
In fact, everything about his recent articles attempting to defend his wacky notions of international trade and currency valuations smacks of expediency and, as Cochrane notes, unfounded, un-normed concepts prone to political manipulation.
Frankly, I just don't think Geithner, a guy who couldn't even do his taxes correctly, or manage to hire a competent accountant, has the mental horsepower to comprehend the current dilemma of US monetary and economic officials.
Back some years ago, I believe in the late 1980s, in a Wall Street Journal editorial, a respected economist made the insightful observation that nations had only two policy levers- monetary and fiscal- with which to attempt to affect three phenomena- domestic economic growth, domestic inflation, and international trade balances. The latter former lever, monetary policy, is typically given the double duty of governing inflation and international trade and currency policies.
Stronger currencies, following from low monetary base growth and/or higher interest rates, tend to hurt economic exports and often bring in foreign investment flows. Pro-growth monetary policies, such as our current weakening dollar and zero interest rates, aid exports but cause global investors to seek other instruments. As a reserve currency, these policies do even more damage by causing global holders of dollars, as a store of value and commonly-accepted medium of exchange, to seek more stable exchange media.
This is where, in past times, gold was used as the third lever to automatically affect international trade flows and valuation. Not coincidentally, monetary base growth, being backed by gold, was restricted from over-expansion by the knowledge that a cheaper currency would only hurt a nation when foreign holders of that currency redeemed it for now-cheaper gold.
Geithner's transparent attempts to force global investors and other countries to overlook US devaluation of the dollar and management of trade flows to our benefit haven't fooled anyone. But, then, what do you expect from a guy who, as a financial plumber, is trying to work beyond his capabilities?
Showing posts with label Geithner. Show all posts
Showing posts with label Geithner. Show all posts
Tuesday, November 16, 2010
Thursday, September 16, 2010
Tim Geithner On Economics
Monday's edition of the Wall Street Journal published a news article entitled Geithner Warns of Risk of Washington Inertia.
Citing the Treasury Secretary as concerned about sluggish US economic performance due to a lack of federal action, the piece states,
"He said the U.S. can no longer rely on consumer spending, which has long powered the economy, to be the growth engine that leads the recovery this time around and said Washington needed to plant the seeds for investment and exports."
If that passage doesn't chill the blood of US private sector business people, what will?
Thinking that perhaps Geithner is, unbeknownst to me, an economic sage, I checked his educational background. His undergraduate degree was in international and Asian studies. The closest thing to a PhD in Economics he possesses is an MA in International Economics from the Johns Hopkins School of Advanced International Studies. I think it's fair to characterize that as more of a political science degree, and less of a hardcore macroeconomic or microeconomic degree.
Thus, Geithner would not appear to have academic credentials to utter credible pronouncements on the seismic shift in drivers of the US economy.
As a former manager of functions and departments in several companies, including consulting firms, I'm used to making decisions involving matters on which I may not have personal academic expertise.
For those situations, I do what most effective managers do. I ask questions, identify assumptions and uncertainties, gather information from credible sources, and choose an option.
In this blog, I've often opined on economic matters, but only in light of, and with explicit references to the views of and evidence provided by esteemed, degreed, generally respected economists.
It causes me more concern than I have already had regarding Geithner that he issues silly, apparently unsubstantiated statements as if they were established or empirically-supported economic fact. No reference to the work of legitimate economists.
Instead, we have the Treasury Secretary simply declaring a preference for government-directed spending on investment and exports. Meaning that he believes a few Washington bureaucrats, elected and/or appointed, are more capable of directing our nation's economic resources than are the millions of investors and business people to whom those resources they ultimately belong.
Very scary stuff, indeed.
Citing the Treasury Secretary as concerned about sluggish US economic performance due to a lack of federal action, the piece states,
"He said the U.S. can no longer rely on consumer spending, which has long powered the economy, to be the growth engine that leads the recovery this time around and said Washington needed to plant the seeds for investment and exports."
If that passage doesn't chill the blood of US private sector business people, what will?
Thinking that perhaps Geithner is, unbeknownst to me, an economic sage, I checked his educational background. His undergraduate degree was in international and Asian studies. The closest thing to a PhD in Economics he possesses is an MA in International Economics from the Johns Hopkins School of Advanced International Studies. I think it's fair to characterize that as more of a political science degree, and less of a hardcore macroeconomic or microeconomic degree.
Thus, Geithner would not appear to have academic credentials to utter credible pronouncements on the seismic shift in drivers of the US economy.
As a former manager of functions and departments in several companies, including consulting firms, I'm used to making decisions involving matters on which I may not have personal academic expertise.
For those situations, I do what most effective managers do. I ask questions, identify assumptions and uncertainties, gather information from credible sources, and choose an option.
In this blog, I've often opined on economic matters, but only in light of, and with explicit references to the views of and evidence provided by esteemed, degreed, generally respected economists.
It causes me more concern than I have already had regarding Geithner that he issues silly, apparently unsubstantiated statements as if they were established or empirically-supported economic fact. No reference to the work of legitimate economists.
Instead, we have the Treasury Secretary simply declaring a preference for government-directed spending on investment and exports. Meaning that he believes a few Washington bureaucrats, elected and/or appointed, are more capable of directing our nation's economic resources than are the millions of investors and business people to whom those resources they ultimately belong.
Very scary stuff, indeed.
Thursday, May 27, 2010
Innocent or Idiot Abroad? Geithner In China & Europe
Am I alone, shaking in fear as I hear our naive Treasury Secretary, Tim Geithner, babbling about economics while abroad in China earlier this week?
After much hoopla surrounding his visit, I heard part of an interview with him on CNBC. Asked about China's insatiable appetite for raw materials, and its potential affects on the US, Geithner chirped about how great it was that China is an important, large global economic power. How wonderful that they, too, have a growing demand for basic commodity metals and energy.
Huh?
What's our chief tax cheat been smoking lately?
Of course, it's true that Geithner's claims to fame have mostly been as a governmental-entity-employed financial systems plumber.
Faced with a real crisis at the New York Fed two years ago, Geithner blinked in negotiations with the French and, in contravention of normal bankruptcy law, promptly paid off AIG's derivatives creditors in full.
An economic sage Geithner is not. What he's doing spreading economic falsehoods is anybody's guess. But last time I checked, US consumers would benefit by less demand for commodities, not more, as that would allow prices to drift lower, not higher.
Yesterday morning, Geithner was already in Europe, making inane comments about the Eurozone's situation.
I can't wait for this idiot to get home and hide out somewhere where he won't embarrass himself or the American people.
After much hoopla surrounding his visit, I heard part of an interview with him on CNBC. Asked about China's insatiable appetite for raw materials, and its potential affects on the US, Geithner chirped about how great it was that China is an important, large global economic power. How wonderful that they, too, have a growing demand for basic commodity metals and energy.
Huh?
What's our chief tax cheat been smoking lately?
Of course, it's true that Geithner's claims to fame have mostly been as a governmental-entity-employed financial systems plumber.
Faced with a real crisis at the New York Fed two years ago, Geithner blinked in negotiations with the French and, in contravention of normal bankruptcy law, promptly paid off AIG's derivatives creditors in full.
An economic sage Geithner is not. What he's doing spreading economic falsehoods is anybody's guess. But last time I checked, US consumers would benefit by less demand for commodities, not more, as that would allow prices to drift lower, not higher.
Yesterday morning, Geithner was already in Europe, making inane comments about the Eurozone's situation.
I can't wait for this idiot to get home and hide out somewhere where he won't embarrass himself or the American people.
Monday, February 22, 2010
Geithner: A Legend In His Own Mind
This morning on CNBC there was mention made of tax cheat and Treasury Secretary Tim Geithner's interview in Vanity Fair.
Two details of the interview came to light.
First, Geithner contemplated an alleged offer to run Citigroup. When I heard that, I burst out laughing, nearly spilling my coffee.
Here's a guy who has been taken to the cleaners by private sector parties, as described here and here.
So what would make anyone, especially Geithner, think he's up to the task of running the horribly-organized mess that is Citigroup?
How incredibly arrogant of Geithner. All anyone has been able to show so far is that Geithner might be a second-rate financial system's plumber, of sorts. Certainly nowhere near up to running a large US bank, much less a deeply-troubled one.
The other incredible admission from the Vanity Fair article is that Geithner now blames his tax cheating on.....TurboTax.
Right. Like you or I could do this and get to be Treasury Secretary. Never mind even just getting amnesty.
If you can stop laughing at this pathetic display of poor judgement on Geithner's part, consider what a whining excuse-maker he is. Nothing is ever Timmy's fault.
Outmaneuvered by Goldman? Had to do it- not his fault. Cheated on his taxes? Not his fault- blame the software.
This guy has to go.
Two details of the interview came to light.
First, Geithner contemplated an alleged offer to run Citigroup. When I heard that, I burst out laughing, nearly spilling my coffee.
Here's a guy who has been taken to the cleaners by private sector parties, as described here and here.
So what would make anyone, especially Geithner, think he's up to the task of running the horribly-organized mess that is Citigroup?
How incredibly arrogant of Geithner. All anyone has been able to show so far is that Geithner might be a second-rate financial system's plumber, of sorts. Certainly nowhere near up to running a large US bank, much less a deeply-troubled one.
The other incredible admission from the Vanity Fair article is that Geithner now blames his tax cheating on.....TurboTax.
Right. Like you or I could do this and get to be Treasury Secretary. Never mind even just getting amnesty.
If you can stop laughing at this pathetic display of poor judgement on Geithner's part, consider what a whining excuse-maker he is. Nothing is ever Timmy's fault.
Outmaneuvered by Goldman? Had to do it- not his fault. Cheated on his taxes? Not his fault- blame the software.
This guy has to go.
Monday, February 01, 2010
Yet Another Excuse From Geithner For AIG's Rough Treatment
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?
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?
Thursday, January 28, 2010
The Continuing Blindness In the AIG Matter
Yesterday's Wall Street Journal carried Holman Jenkins' weekly column. This week's topic was Geithner, Goldman and AIG.
Jenkins engaged in some very humorous role play, contending that Geithner didn't really have much leverage over Goldman et. al. He articulated two options: total nuclear annihilation via an AIG-triggered systemic meltdown, or; explicit exchange of political favors for accepting a haircut on AIG positions.
After discussing the two options, Jenkins offered that a simple government guarantee of AIG's positions would have restored order to the market, probably without costing anything. Certainly less than a complete takeover and payouts to counterparties.
I think Jenkins' idea is sound, but he omitted one very credible alternative that Geithner & Co. have never discussed.
That is, a simple carving out of AIG's financial products unit for placement into bankruptcy. Such a move would have isolated the troubled portion of the insurer from the heavily-regulated insurance operations.
Once in bankruptcy, AIG's counterparties would no longer have a right to 100% payments for positions. But an orderly disposition could have occurred, again avoiding needless losses to US taxpayers.
It continues to mystify me why only one Journal contributor has ever raised this option. It's the default path for failing companies, and should have been the preferred option for AIG.
Geithner may or may not have been guilty of various malfeasances or neglectful inactions in the AIG situation. But one thing is sure. He and his team were surely guilty of a lack of creativity and perspective on the situation.
Jenkins engaged in some very humorous role play, contending that Geithner didn't really have much leverage over Goldman et. al. He articulated two options: total nuclear annihilation via an AIG-triggered systemic meltdown, or; explicit exchange of political favors for accepting a haircut on AIG positions.
After discussing the two options, Jenkins offered that a simple government guarantee of AIG's positions would have restored order to the market, probably without costing anything. Certainly less than a complete takeover and payouts to counterparties.
I think Jenkins' idea is sound, but he omitted one very credible alternative that Geithner & Co. have never discussed.
That is, a simple carving out of AIG's financial products unit for placement into bankruptcy. Such a move would have isolated the troubled portion of the insurer from the heavily-regulated insurance operations.
Once in bankruptcy, AIG's counterparties would no longer have a right to 100% payments for positions. But an orderly disposition could have occurred, again avoiding needless losses to US taxpayers.
It continues to mystify me why only one Journal contributor has ever raised this option. It's the default path for failing companies, and should have been the preferred option for AIG.
Geithner may or may not have been guilty of various malfeasances or neglectful inactions in the AIG situation. But one thing is sure. He and his team were surely guilty of a lack of creativity and perspective on the situation.
Tuesday, January 19, 2010
Geithner Played For a Sap By The French In 2008
This morning's Wall Street Journal contains perhaps the most damning evidence yet of how badly current Treasury Secretary Tim (tax scofflaw) Geithner bungled the AIG situation back in 2008.
We now learn, courtesy of the Journal piece, that the two french banks owed significant amounts of money on AIG swaps claimed that their executive would be imprisoned if they took less than the contractually-obligated full payment due.
Amazingly, Geithner, played by a sap by bankers not even domiciled in his own country, collapsed and acceded to their demands. Then, to complete the travesty, decided that, since all AIG creditors must be treated equally, everybody else would get full payment, too.
Guess who footed that bill? Yep, you and me, if you are an American reading this.
Of course, this whole mess is why we have bankruptcy law. It prevents ill-equipped, inexperienced officials from making bad policy decisions. In this case, atrociously bad monetary policy.
As I, and others, have argued for over a year, were AIG to simply have been put into bankruptcy, if not aided, like the other major US financial institutions, then none of this would have happened. Instead, a bankruptcy court would almost certainly have proportionally allocated assets available to the financial products group among its creditors. Period.
This sort of uncertainty is what erodes the confidence of business people. Geithner's actions, both as NY Fed president and Treasury Secretary, have been nothing, if not erratic and inexplicable.
I suspect that, with continued mis-leadership like this in the financial sector, it will be some time before a genuine, non-government-money-stoked recovery takes hold in the US.
We now learn, courtesy of the Journal piece, that the two french banks owed significant amounts of money on AIG swaps claimed that their executive would be imprisoned if they took less than the contractually-obligated full payment due.
Amazingly, Geithner, played by a sap by bankers not even domiciled in his own country, collapsed and acceded to their demands. Then, to complete the travesty, decided that, since all AIG creditors must be treated equally, everybody else would get full payment, too.
Guess who footed that bill? Yep, you and me, if you are an American reading this.
Of course, this whole mess is why we have bankruptcy law. It prevents ill-equipped, inexperienced officials from making bad policy decisions. In this case, atrociously bad monetary policy.
As I, and others, have argued for over a year, were AIG to simply have been put into bankruptcy, if not aided, like the other major US financial institutions, then none of this would have happened. Instead, a bankruptcy court would almost certainly have proportionally allocated assets available to the financial products group among its creditors. Period.
This sort of uncertainty is what erodes the confidence of business people. Geithner's actions, both as NY Fed president and Treasury Secretary, have been nothing, if not erratic and inexplicable.
I suspect that, with continued mis-leadership like this in the financial sector, it will be some time before a genuine, non-government-money-stoked recovery takes hold in the US.
Friday, November 20, 2009
Goldman, AIG, Geithner & The Repaid Collateral
Wednesday's Wall Street Journal featured a very damning article concerning Treasury Secretary Tim Geithner's mishandling of the payment of collateral to Goldman Sachs for its AIG positions last year, as head of the New York Federal Reserve Bank.
In article entitled "Report Rebuts Goldman Claim," following only days after the Journal published Goldman's assertions that it never needed those payments, and was completely and safely hedged on its AIG exposures, the piece states,
"A government report throws cold water on that claim."
It continues,
"Goldman was among the largest beneficiaries of a decision by the Federal Reserve Bank of New York to bail out insurance giant AIG in September 2008 at the height of the financial crisis. A revamped rescue package in November led to Goldman and 15 other banks being paid in full for $62 billion worth of insurance contracts they had with AIG to protect against losses tied to mortgage assets."
At the time, Geithner, as head of the New York Fed, was responsible for determining what to do regarding the various failing investment and commercial banks in the city, as well as administering the AIG situation.
According to the Journal article,
"The government auditor's report broadly found that the New York Fed left itself little room in negotiating with the banks for a better deal for taxpayers."
Hard to improve on that succinct finding, it is?
No wonder two Republican Representatives spoke out bluntly at yesterday's hearing in Washington related to the TARP, demanding Geithner's resignation. Well, that's not strictly true. One asked Geithner to resign, the other reiterated his opposition for Geithner to have ever been confirmed as Treasury Secretary.
Regarding the specifics of the report, the Journal piece notes,
"Goldman's trading position with AIG centered on $22.1 billion of such insurance the firm had purchased from AIG. In a separate series of trades, Goldman itself had sold protection against losses on the same securities to other trading firms.
The problem for Goldman: If AIG collapsed and markets continued to swoon, Goldman would have had to make payments to the other trading firms and been unable to collect on protection it had bought from AIG.
Underlying many of these credit bets was a mass of mortgage debt, securities backed by pools of subprime home loans and commercial real-estate debt, and then more complicated securities also linked to mortgages. The packaging of all those securities helped fuel the U.S. housing boom and subsequently sparked the credit crisis.
Goldman was among the largest beneficiaries of a decision by the Federal Reserve Bank of New York to bail out insurer AIG in September 2008 at the height of the financial crisis. Above, the headquarters of Goldman Sachs in New York.
Goldman has said it was insulated against a material loss by an AIG default. And the audit pointed out that Goldman in fact was protected against some losses. For example, the firm had collected $8.4 billion of collateral, cash or a liquid equivalent, from AIG. Separately, Goldman took steps to try to buy insurance against insurance by purchasing protection against an AIG default.
But the audit raised questions about Goldman's calculations. Goldman believed that it controlled $4.3 billion in assets, pools of fixed-income securities that require complex computer modeling to design and understand, that would have been used to counter an AIG default. The securities are called collateralized debt obligations, or CDOs.
The audit said, however, that given the fact that the market for those securities had tanked in November 2008, and that an AIG default would have sparked a rout, Goldman would have had a difficult time obtaining value for those assets.
"It is far from certain that the underlying CDOs could have easily been liquidated, even at the discounted price of $4.3 billion, the audit found.
The audit also said Goldman would have faced the same problem of declining market value for another pool of assets valued at $5.5 billion had AIG defaulted. The bottom line: The audit said those assets that Goldman held would have been worth a lot less had AIG failed."
This directly contradicts information which Goldman has been dispensing for some time alleging that it could have realized the roughly $10B of value in the two pools of AIG-related assets.
As if to highlight the lack of transparency surrounding the TARP's implementation and, then, later accounting for those actions, the Journal reported,
"A spokeswoman for the special inspector overseeing the Troubled Asset Relief Program wasn't available for comment. The New York Fed said it "acted appropriately" in its dealings with AIG trading partners."
No surprises there, eh? The New York Fed is in deep damage control mode, covering Geithner's and it's own asses. The TARP special inspector knows a good, long civil service job when s/he sees it, and isn't talking, either.
It seems that many people are now choosing to recall last year's events radically differently than they actually occurred. Now Geithner's former employer clams up about the AIG disbursements and Goldman contends it was never in dire straits, but, evidently, exchanged its investment banking license for a commercial bank one, just for kicks.
And the taxpayers aren't being clearly told how Geithner's fumbling resulted in their paying Goldman $10B to cover the investment bank's own errors in judgement.
In article entitled "Report Rebuts Goldman Claim," following only days after the Journal published Goldman's assertions that it never needed those payments, and was completely and safely hedged on its AIG exposures, the piece states,
"A government report throws cold water on that claim."
It continues,
"Goldman was among the largest beneficiaries of a decision by the Federal Reserve Bank of New York to bail out insurance giant AIG in September 2008 at the height of the financial crisis. A revamped rescue package in November led to Goldman and 15 other banks being paid in full for $62 billion worth of insurance contracts they had with AIG to protect against losses tied to mortgage assets."
At the time, Geithner, as head of the New York Fed, was responsible for determining what to do regarding the various failing investment and commercial banks in the city, as well as administering the AIG situation.
According to the Journal article,
"The government auditor's report broadly found that the New York Fed left itself little room in negotiating with the banks for a better deal for taxpayers."
Hard to improve on that succinct finding, it is?
No wonder two Republican Representatives spoke out bluntly at yesterday's hearing in Washington related to the TARP, demanding Geithner's resignation. Well, that's not strictly true. One asked Geithner to resign, the other reiterated his opposition for Geithner to have ever been confirmed as Treasury Secretary.
Regarding the specifics of the report, the Journal piece notes,
"Goldman's trading position with AIG centered on $22.1 billion of such insurance the firm had purchased from AIG. In a separate series of trades, Goldman itself had sold protection against losses on the same securities to other trading firms.
The problem for Goldman: If AIG collapsed and markets continued to swoon, Goldman would have had to make payments to the other trading firms and been unable to collect on protection it had bought from AIG.
Underlying many of these credit bets was a mass of mortgage debt, securities backed by pools of subprime home loans and commercial real-estate debt, and then more complicated securities also linked to mortgages. The packaging of all those securities helped fuel the U.S. housing boom and subsequently sparked the credit crisis.
Goldman was among the largest beneficiaries of a decision by the Federal Reserve Bank of New York to bail out insurer AIG in September 2008 at the height of the financial crisis. Above, the headquarters of Goldman Sachs in New York.
Goldman has said it was insulated against a material loss by an AIG default. And the audit pointed out that Goldman in fact was protected against some losses. For example, the firm had collected $8.4 billion of collateral, cash or a liquid equivalent, from AIG. Separately, Goldman took steps to try to buy insurance against insurance by purchasing protection against an AIG default.
But the audit raised questions about Goldman's calculations. Goldman believed that it controlled $4.3 billion in assets, pools of fixed-income securities that require complex computer modeling to design and understand, that would have been used to counter an AIG default. The securities are called collateralized debt obligations, or CDOs.
The audit said, however, that given the fact that the market for those securities had tanked in November 2008, and that an AIG default would have sparked a rout, Goldman would have had a difficult time obtaining value for those assets.
"It is far from certain that the underlying CDOs could have easily been liquidated, even at the discounted price of $4.3 billion, the audit found.
The audit also said Goldman would have faced the same problem of declining market value for another pool of assets valued at $5.5 billion had AIG defaulted. The bottom line: The audit said those assets that Goldman held would have been worth a lot less had AIG failed."
This directly contradicts information which Goldman has been dispensing for some time alleging that it could have realized the roughly $10B of value in the two pools of AIG-related assets.
As if to highlight the lack of transparency surrounding the TARP's implementation and, then, later accounting for those actions, the Journal reported,
"A spokeswoman for the special inspector overseeing the Troubled Asset Relief Program wasn't available for comment. The New York Fed said it "acted appropriately" in its dealings with AIG trading partners."
No surprises there, eh? The New York Fed is in deep damage control mode, covering Geithner's and it's own asses. The TARP special inspector knows a good, long civil service job when s/he sees it, and isn't talking, either.
It seems that many people are now choosing to recall last year's events radically differently than they actually occurred. Now Geithner's former employer clams up about the AIG disbursements and Goldman contends it was never in dire straits, but, evidently, exchanged its investment banking license for a commercial bank one, just for kicks.
And the taxpayers aren't being clearly told how Geithner's fumbling resulted in their paying Goldman $10B to cover the investment bank's own errors in judgement.
Despite the clear evidence from the government's own inspectors that Goldman badly needed those troubled, AIG-related assets to be made good, the firm continues to dissemble.
It's pretty clear that Geithner was vastly out-maneuvered and out-muscled by Goldman. Now, both the administration and the Fed want to cover this up. This is why it is folly to allow government to become deeply involved in business, whether successful or failed. Instead, the Constitution provided for bankruptcy, and it remains the best option for sorting out this sort of mess and dissovling failed enterprises.
Thursday, March 26, 2009
On Geithner's PPIP Plan
Earlier today I published this post with two video clips of economist James Galbraith opining on Treasury Secretary Geithner's PPIP plan. My business partner noted that the accompanying text with the videos, provided by fallen tech brokerage analyst Henry Blodget, is quite good and concise. These two charts, here and here, are very arresting.
Galbraith and his interviewers make the case that there is, and always has been, a perfectly good alternative to all of these bailout and rescue plans. Simply put, place insolvent non-bank institutions into bankruptcy, take the banks into the FDIC and put insured depositors into new institutions, while allowing other institutions to bid on the loans and other assets of the failed financial firms.
However, Geithner, his boss, and even people like NY insurance czar Eric Dinallo, this morning on CNBC, swear that the only way credit markets can be rehabilitated is through the process that Giethner proposes. Which, by the way, as Blodget notes, is very much the same vehicle that Paulson proposed with the TARP. Government organizes a sale of assets to the private sector. You can quibble about whether the government attaches a guarantee of some sort to it, and how much each shares in loss or profit, but the basic idea is the same.
Galbraith and Blodget demolish these arguments, and more, in their respective critiques of Geithner's DOA plan.
Then we come to the recent furor over the AIG retention payments. Holman Jenkins of the Wall Street Journal wrote on Wednesday of this week, in his column entitled "The Real AIG Disgrace,"
"Yet the AIG bonus episode, the administration's one true disgrace so far, will not soon be forgotten.
Galbraith and his interviewers make the case that there is, and always has been, a perfectly good alternative to all of these bailout and rescue plans. Simply put, place insolvent non-bank institutions into bankruptcy, take the banks into the FDIC and put insured depositors into new institutions, while allowing other institutions to bid on the loans and other assets of the failed financial firms.
However, Geithner, his boss, and even people like NY insurance czar Eric Dinallo, this morning on CNBC, swear that the only way credit markets can be rehabilitated is through the process that Giethner proposes. Which, by the way, as Blodget notes, is very much the same vehicle that Paulson proposed with the TARP. Government organizes a sale of assets to the private sector. You can quibble about whether the government attaches a guarantee of some sort to it, and how much each shares in loss or profit, but the basic idea is the same.
Galbraith and Blodget demolish these arguments, and more, in their respective critiques of Geithner's DOA plan.
Then we come to the recent furor over the AIG retention payments. Holman Jenkins of the Wall Street Journal wrote on Wednesday of this week, in his column entitled "The Real AIG Disgrace,"
"Yet the AIG bonus episode, the administration's one true disgrace so far, will not soon be forgotten.
Tim Geithner is rightly on the hot seat for saying he didn't know about the bonuses until just weeks ago -- because he should have quelled this furor before it ever got started. Instead he played dumb and climbed aboard the outrage bandwagon -- and let Mr. Obama do the same.
Whether Mr. Geithner knew the specifics is unimportant. The retention plan was known to his staff. The details had been disclosed over and over in public filings. As far back as October, New York Attorney General Andrew Cuomo had summoned the Treasury-appointed Mr. Liddy to hammer out a deal on AIG's pay practices. Said Mr. Cuomo in a statement afterward: "These actions are not intended to jeopardize the hard-earned compensation of the vast majority of AIG's employees, including retention and severance arrangements, who are essential to rebuilding AIG and the economy of New York."
The voluble Rep. Elijah Cummings had been railing about AIG retention bonuses almost continually, on air, in the print media, and in publicly released letters to Mr. Liddy, since Dec. 1.
On March 3, Mr. Geithner himself was quizzed during a congressional hearing in detail about the AIGFP retention plan by Democratic Rep. Joe Crowley -- a week before Mr. Geithner now says he heard of the plan.
But the biggest lesson here is the old one that the price of freedom is eternal vigilance -- beginning with insistence on the rule of law. Americans clearly cannot trust their elected officials to defend their rights and interests, or care whether justice is served, when the slightest political risk might attach to doing so.
Which brings us back to Mr. Cuomo, whose office has been implicitly threatening to publish names of AIG employees who don't relinquish pay they were contractually entitled to.
Mr. Cuomo is a thug, but at least he reminds us: It can happen here."
First, I think it bears some consideration of what must have transpired for Jenkins to write that last sentence. I would bet that Rupert Murdoch himself cleared it. You don't call the NY AG a thug without steeling yourself for retribution.
But, beyond that, Jenkins' careful recounting of who knew what, when, demonstrates another, more human behavior-based reason why Geithner's PPIP program will fail.
No matter what Geithner swears will be acceptable, including massive private investor profits on these toxic assets, he can't actually guarantee that Congress will not react in the future the same way they reacted to the very reasonable and already known AIG retention payments, i.e., abrogate contracts, pass bills of attainder, and otherwise behave unconstitutionally.
Why will any private investor believe an administration's promises? Remember when Hank Paulson swore that TARP funds would not entail any active interest whatsoever by the federal government in the institutions which agreed, upon request, to accept the money?
Now they have their entire compensation systems subjected to Congressional mandate.
The truth is, nobody knows how today's buyer of a PPIP-offered asset will be treated next quarter, or next year, by Congress, when, in a fit of pique, that branch of government decides that the profits earned by those private buyers are, in fact, unacceptable. That the deal offered by the PPIP was not fair to taxpayers. Or whatever other ex post facto reason Congress may choose to use to unfairly appropriate gains after the fact.
The banks selling the toxic assets at low prices will risk insolvency. The buyers will risk some loss, and, worse, taking of their profits by the government, if they do profit.
On many bases, Geithner's overly-complex, ambitious and naive plan for relieving financial institutions of bad loans and securities won't work. It would be simpler to just force realistic valuations, close the insolvent institutions, transfer any insured deposits, and sell off the assets, thus providing real, market-determined prices. As well as removing inept management and providing room for better managers to provide fresh financing, when and as needed, to the economy.
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