Today the Wall Street Journal (www.wsj.com) has an opinion piece on Tim Geithner and AIG. When the AIG troubles surfaced, Geithner was President of the NY Fed, and Hank Paulson was the Treasury Secretary. Previously I have written about Paulson (http://tinyurl.com/6oyuma). Whenever private companies get bailed out by governments, there is always trouble.
No matter what the Wall Street talking heads have said, or are saying, they were all virtually bankrupt as far back as August of 2007 when the financial melt down first surfaced. Way back then Paulson came up with emergency measures to prop up the banks. Paulson did this to protect his cronies on Wall Street. They can talk all they want about saving the American financial system, but while it would have hurt badly, the system would have rebuilt itself with different banks and different people in charge. We would never have had troops in the streets and long bread lines like we did in the 1930’s.
Geithner acting on Paulson’s behalf began trying to piece together a quilt which would allow the NY Bankers to recoup all their assets, hide the bad debt and bad assets in the Federal Reserve System and Treasury, and make AIG the scapegoat for everything that is wrong with American finance. This preserved the oligopoly that the Wall Street bankers created and used to reap tremendous profit off the backs of their own customers.
Rather than looking at the verbiage, let’s look at the facts. Wall Street got paid 100 cents on the dollar for all the bad paper that they floated with AIG. Yet, when arguing about mark to market accounting rules, Wall Street wanted to suspend them because they said “the market” was not pricing the assets correctly. At the depths of the financial crisis, many of those assets would have been lucky to get ten cents on the dollar. But since, Wall Street has deep pockets and spent a lot of that largesse on lobbying in DC. They also have a revolving door between the Treasury, Justice and other departments within every administration going back to before I was born. Amazingly, they were able to recoup 100% of their assets and have government sweep it under the rug. Government with it’s long investment time horizon now gets to wait and see if those “investments” pan out.
Interestingly, Geithner in questioning took the same approach virtually every mindless bureaucrat has taken since 1987 when there is a disruption in the financial system. He blamed derivatives. Derivatives themselves were not the problem. Government was the problem. Nobel Prize winner Merton Miller wrote about derivatives in the context of Orange County in the early 1990’s and his words are even more impressive today(http://tinyurl.com/ydk8x6m). He says, “These are policy disasters, tracing not to transactions between private-sector parties, but to the deliberately deflationary actions of a central bank somewhere, usually reacting to its previous policy errors in the other direction.” Many fingers in this crisis can be pointed at many culprits, but the ringleader of the crime was the Federal Government and its easy money policy at the Federal Reserve, and the fiscal policy using Fannie Mae and Freddie Mac to subsidize portions of the populace. Geithner doesn’t want to point the finger at his bosses, and isn’t prescient enough to understand how culpable they are.
As we start to sift through the wreckage, it is very important for our Representatives and Senators to ask tough questions. How complicit were government officials in moving things around, and how much have they lied to us about what they did and what they promised? I wouldn’t trust anything anyone says, but would rather see some documentation. This is one of the times you want your elected official to be a really good criminal attorney. They are trained to ask and pore through to find the truth. Of course, many of our elected representatives from both parties have been bought with Wall Street cash. Reagan said, “Trust but verify”, but I honestly don’t think that any of these guys can be trusted. They are too busy lining their pockets and trying to save their own skins.