Audit Criticizes Federal Reserve Bank of New York for Handling of AIG Bailout

The New York Times reports that a government investigation faults the Federal Reserve Bank of New York for failing to use its "considerable leverage" when it decided to pay AIG's banking creditors the full value of their insured risk. AIG "insured" risky financial transactions of its investment banking clients, like Goldman Sachs. AIG, however, failed to maintain enough reserve assets to cover to extent of the financial risk it insured. When the investments soured, the investment banks came to collect from AIG, which sent the company into financial ruin.

Federal regulators at the Federal Reserve Bank of New York, the Federal Reserve, and the Treasury Department, however, stepped in to provide assistance to AIG, which ultimately meant covering its obligations to creditors. A prior blog entry on Dissenting Justice discusses the connections that many of the federal regulators had to Goldman Sachs, which received nearly $13 billion from AIG after the federal government rescued the company. Here is a quote from that essay:

Henry Paulson, Secretary of Treasury during the Bush administration, is a former Chairman of Goldman Sachs. Paulson was responsible for administering TARP, and he had a large role in structuring the legislation.

Robert Rubin, Secretary of Treasury during the Clinton administration, was a Co-Chairman of Goldman (along with Stephen Friedman -- see below) before he earned a Cabinet post. Although Rubin does not have a formal position in the Obama administration, he has served as an informal economic advisor to the President. Also, current Secretary of Treasury Tim Geithner worked as an assistant to Rubin (and later to Lawrence Summers -- former Secretary of Treasury and current head of Obama's National Economic Council) when he headed the agency. Paulson was also a partner at Goldman when Rubin was Co-Chairman.

Mark Patterson, Geithner's Chief of Staff, is a former lobbyist for Goldman. Obama waived his anti-lobbying rules in order to secure the job for Patterson.

Tim Geithner, current Secretary of Treasury, served as the President of the Federal Reserve Bank of New York until his current position. In that capacity, he helped to structure the federal bailout of AIG. Geithner, unlike many of the other individuals listed in this article, never worked at Goldman, but he worked for Rubin during the Clinton administration and for Summers, who replaced Rubin. Summers heads Obama's National Economic Council.

Stephen Friedman, the current Chairman of the Federal Reserve Bank of New York, was the Co-Chairman of Goldman with Rubin, and he has held several other executive positions at the company. In his current position, Friedman presumably will have a significant role in the ongoing federal bailout of AIG. Friedman also sits on the board of directors of Goldman.

According to the New York Times, federal auditors challenged Goldman Sachs, which argues that it should not have been forced to collect from AIG in a bankruptcy proceeding. Earlier reports (including an entry on Dissenting Justice) argued that the federal government should have forced AIG, like the auto industry, to go into bankruptcy, and that Goldman Sachs likely would not have collected nearly as much money from the troubled insurer. The auditors confirm the position taken in these previous reports.

Goldman Sachs, however, continues to deny that it received preferential treatment; Geithner also says that Goldman Sachs did not benefit from a backroom deal. But as the auditors' report states, regardless of the parties' intent, "[t]ens of billions of dollars of government money was funneled inexorably and directly to A.I.G.’s counterparties." This story will likely continue to unfold.

More Outrage: Obama Administration Knew About the Bonuses Months Ago

In addition to blocking legislation that would have prevented AIG's bonus payments, the Obama administration actually knew about the pending bonuses months ago from SEC filings and letters from lawmakers demanding action. Great.

Here is the latest, courtesy of the Associated Press (via Yahoo News):

For months, the Obama administration and members of Congress have known that insurance giant AIG was getting ready to pay huge bonuses while living off government bailouts. It wasn't until the money was flowing and news was trickling out to the public that official Washington rose up in anger and vowed to yank the money back.

Why the sudden furor, just weeks after Barack Obama's team paid out $30 billion in additional aid to the company? So far, the administration has been unable to match its actions to Obama's tough rhetoric on executive compensation. And Congress has been unable or unwilling to restrict bonuses for bailout recipients, despite some lawmakers' repeated efforts to do so.

The situation has the White House and Treasury Secretary Timothy Geithner on the defensive. The administration was caught off guard Tuesday trying to explain why Geithner had waited until last Wednesday to call AIG chief executive Edward M. Liddy and demand that the bonus payments be restructured.

Publicly, the White House expressed confidence in Geithner — but still made it clear he was the one responsible for how the matter was handled.

Is Geithner going under the bus? For the record, I think that AIG is not "guilty" of anything -- except for spending money that the government gave it. The government's decision to hand the company a blank check is more blameworthy.

See also:

Misdirected Outrage: Public Should Bash the Feds for Giving AIG a "Blank Check"

Sincere or False Outrage? The Obama Administration Smacks Down AIG

Warning to Progressives: NYT Proclaims Obama Will Govern From Center-Right

Progressives are experiencing a collective meltdown as Hillary Clinton prepares to become Secretary of State in the Obama administration. During the primaries, the Left contended that Clinton was hawkish and that she would only offer more of the same militaristic and dangerous practices of the Bush administration. Obama, by contrast, was portrayed almost exclusively as a dove -- even when he equivocated on Iraq, Iran and other sensitive areas of national security.

Progressives are also ablaze over the rumored selection of Timothy Geithner as Secretary of Treasury. Geithner has worked with Paulson to bail-out AIG and Bear Stearns. Initially, the leftwing of the party feared that Obama would choose Larry Summers for the post. Progressives criticize Summers because he supported deregulation of financial markets, which many liberals believe caused the current economic crisis. Summers also sparked controversy during his tenure as president of Harvard University when he said that women are not genetically wired to excel in the hard sciences.

Instead of selecting Summers, Obama's transition team seems to have settled upon his protoge. Most political analysis to date characterizes Geithner as being moderate or center-right. Accordingly, his selection gives progressives another reason to complain.

Today's New York Times explains that Obama's cabinet decisions suggest that he will govern from the center-right, despite the enthusiasm he has generated among leftists. Here's a snippet:

[Obama's] reported selections for two of the major positions in his cabinet — Senator Hillary Rodham Clinton as secretary of state and Timothy F. Geithner as Secretary of the Treasury — suggest that Mr. Obama is planning to govern from the center-right of his party, surrounding himself with pragmatists rather than ideologues.

The choices are as revealing of the new president as they are of his appointees — and suggest that, from its first days, an Obama White House will brim with big personalities and far more spirited debate than occurred among the largely like-minded advisers who populated President Bush’s first term.

My take: Bill Clinton's "pragmatism" made him the enemy of the left, and Hillary Clinton suffered from this too. But liberals can only survive in a national office if they are pragmatic (particularly because the country remains center-right, despite the exuberance of the left). Pragmatism, however, is not a theme in the narrative the left uses to describe Obama. By contrast, they have argued that Obama will restore the country's image domestically and internationally, bring about peace, provide jobs for the middle-class, end discrimination, bigotry and social divisions, banish partisanship, slay the GOP, and usher in a new New Deal. I imagine some of them will begin altering that narrative in the near future.

PS: I like the argument that the author provides for the Obama team. Although Obama's cabinet choices might upset people on the Left, their anger is misplaced. Having conservatives and moderates serve in Obama's cabinet allows for "spirited debate," which did not occur during the nasty, evil Bush administration. So liberals -- be quiet!

Also the author suggests a false dichotomy between pragmatism and leftist ideology; Obama is going for the center-right by picking pragmatists (not leftists). As a pragmatic leftist, I take offense at the dichotomy, but I'm just a mere blogger, not a learned New York Times journalist. Smell the fresh scent of sarcasm. Ain't it great?