Special Inspector: AIG Counterparty VOLUNTEERED to Take a Haircut, But Geithner Refused

Zero Hedge

I received an advance copy of the Special Inspector General for
Tarp’s Report called “Factors Affecting Efforts to Limit Payments to
AIG Counterparties”, which will be released tomorrow. (It will be
posted tomorrow for your review)

The report reveals that at least one counterparty indicated that it was willing to
take a reduced payout on its credit default swaps. In other words,
then-head of the Federal Reserve Bank of New York – Tim Geithner -
wouldn’t have had to even play hardball to get a concession from the
counterparty.

But Geithner ended up dictating that all of AIG’s counterparties get full payment – with no haircuts for anyone (except the American taxpayer).

The report includes these gems:

• As a policy matter, FRBNY was unwilling to use its leverage as the
  regulator for several of the counterparties to compel concessions, in
  part because in the negotiations it was acting as a creditor of AIG and
  not as the counterparties’ primary regulator

• Also as a policy matter, FRBNY was uncomfortable with violating the principal of sanctity of contract.

Well sure, that makes sense. A creditor doesn’t want to negotiate hard and demand concessions from its debtor, now does it?

Apparently, while Geithner was concerned with the sanctity of the CDS contracts
(which – I would argue – were all based on fraudulent representations
concerning how safe an investment they were), he didn’t care very much
about the sanctity of the agreement of a government to do what is best
for its people.

But actually, the New York Fed isn’t a government agency. The Fed itself maintains that:

While the Fed’s Washington-based Board of Governors is a federal agency
subject to the Freedom of Information Act and other government rules, the New York Fed and other regional banks maintain they are separate institutions, owned by their member banks, and not subject to federal restrictions.

So really Geithner – as head of the private bank-owned and managed New
York Fed – was simply serving his constituency: the giant New York
money center banks. Geithner’s constituency never was the American public.

The giant banks were the creditors of the giant banks. Like two sock
puppets putting on a big show of good cop / bad cop show, the New York
Fed pretended that it was negotiating hard, but ended up making sure
that the boys got their full cut.

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