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Time to Get Geithner under Oath on AIG

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Edward Liddy, AIG’s CEO, will testify before Barney Frank’s committee tomorrow (10AM, CSPAN3, and yes, we’ll be liveblogging it).

But after reading the letter Andrew Cuomo just sent to Chairman Barney, I think the guy we need under oath is Tim Geithner. After all, over the weekend Geither allowed himself to be convinced that AIG had to pay out its retention bonuses. But today, we learn the following:

  • [Cuomo’s] Office has reviewed the legal opinion that AIG obtained from its own counsel, and it is not at all clear that these lawyers even considered the argument that it is only by the grace of American taxpayers that members of Financial Products even have jobs, let alone a pool of retention bonus money.
  • AIG was able to bargain with its Financial Products employees since these employees have agreed to take salaries of $ I for 2009 in exchange for receiving their retention bonus packages. The fact that AIG engaged in this negotiation flies in the face of AIG’s assertion that it had no choice but to make these lavish multi-million dollar bonus payments.
  • [N]umerous individuals who received large "retention" bonuses are no longer at the firm [including one person whose bonus of $4.6 million made him one of the top seven receipients of bonuses].
  • [T]he contracts under which AIG decided to make these payments … contain a provision that required most individuals’ bonuses to be 100% of their 2007 bonuses.

Now, presumably, Tim Geithner knew all these details from his conversations with Liddy over the weekend. Hell, he should know the details from when, as NY Fed President, he negotiated the bailout last year.

Yet he came to the American people and claimed we simply had to pay these bonuses. Why?

Obama to Geithner: Get That Bonus Money Back

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It sounds like Obama has told Tim Geithner to go back to Edward Liddy and explain that $100 million bonuses are unacceptable.

I’m glad that Obama did this (after seeing the outrage in Congress no doubt). I’m still astounded that Geithner needed to be told. And I’m still suspicious that Geithner was responding to threats from AIG that no one is much talking about. 

Obama’s statement here has a hint of something I’d like to see more of: he suggests that the appropriate response to AIG’s audacious demand for its bonuses is the same kind of regulation over big finance schemes like AIG that FDIC has over banks.

Still, it was only a suggestion.

It seems that this AIG demand ought to elicit the kind of response that drives reform over all the weasels in Congress trying to prevent it. "Well, that’s the last straw," I wish Obama had said, "If that’s how you respond to hundreds of billions in help from the federal government, we’re going to regulate you so heavily you’ll be begging to give your bonuses away in a matter of months."

There are still a lot of obstructionists in Congress who don’t want their gravy train to get clipped. This is the moment when Obama should be mobilizing the outrage of such events to roll over those obstructionists.

Of course, that’s not going to happen so long as there are so many obstructionists in Obama’s inner circle. 

The Semtex in the AIG Retention Contracts

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Here’s how I understand the white paper AIG just used to convince Tim Geithner that, while the US government can force car companies to cut the wages of line workers, the US government cannot force banksters to cut the wages of the thugs who broke the global financial system. There’s a lot of mumbo jumbo about contract law, but that’s not the real reason AIG is arguing Geithner can’t strip the bonuses. It’s the "business reasons" that amount to a deliberate threat:

For example, AIGFP is a party to derivative and structured transactions, guaranteed by AIG, that allow counterparties to terminate in the event of a “cross default” by AIGFP or AIG. A cross default in many of these transactions is defined as a failure by AIGFP to make one or more payments in an amount that exceeds a threshold of $25 million.

In the event a counterparty elects to terminate a transaction early, such transaction will be terminated at its replacement value, less any previously posted collateral. Due to current market conditions, it is not possible to reliably estimate the replacement cost of these transactions. However, the size of the portfolio with these types of provisions is in the several hundreds of billions of dollars and a cross-default in this portfolio could trigger other cross-defaults over the entire portfolio of AIGFP.

Translated, I take that to mean that AIGFP is a party to a bunch of contracts insured by AIG the US government. And if AIGFP somehow does something that equates to a default on those contracts, then AIG the US government is on the hook for hundreds of billions of dollars. 

The white paper goes on to explain just one scenario that might trigger a default in terms of these contracts.

Departures also have regulatory ramifications. As an example, the resignation of the senior managers of AIGFP’s Banque AIG subsidiary would allow the Commission Bancaire, the French banking regulator, to appoint its own designee to step in and manage Banque AIG. Such an appointment would constitute an event of default under Banque AIG’s derivative and structured transactions, including the regulatory capital CDS book ($234 billion notional amount as of December 31, 2008), and potentially cost tens of billions of dollars in unwind costs. Read more →

Is Geithner Planning on a Public-Private Partnership with the Sovereign Wealth Funds?

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The big gimmick to Tim Geithner’s new plan to avoid nationalizing the banks save the big banks is a public-private partnership.

Public-Private Investment Fund: One aspect of a full arsenal approach is the need to provide greater means for financial institutions to cleanse their balance sheets of what are often referred to as “legacy” assets. Many proposals designed to achieve this are complicated both by their sole reliance on public purchasing and the difficulties in pricing assets. Working together in partnership with the FDIC and the Federal Reserve, the Treasury Department will initiate a Public-Private Investment Fund that takes a new approach.

  • Public-Private Capital: This new program will be designed with a public-private financing component, which could involve putting public or private capital side-by-side and using public financing to leverage private capital on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion.
  • Private Sector Pricing of Assets: Because the new program is designed to bring private sector equity contributions to make large-scale asset purchases, it not only minimizes public capital and maximizes private capital: it allows private sector buyers to determine the price for current troubled and previously illiquid assets

There are a couple of sources of private money available on the scale that is necessary to help out: billionaires like Warren Buffett (net worth, $62 billion), pension funds (total assets as of last September, before the crash, $28.1 trillion), mutual funds (total assets before the crash, $26.2 trillion). While Buffett has shown some willingness to bail out these banks for the right price, I can’t see pension and mutual funds wanting to take on the risk.

And then there’s a source of funding that the big banks have already turned to in an effort to stave off this crash–a source which has a lot invested in forestalling nationalization: sovereign wealth funds (total assets before the crash, $2.7 to $3.2 trillion, and expected to grow to between $5 and $13 trillion).  SWFs, of course, are the investment arms of oil producers like Saudi Arabia, Kuwait, and the UAE, and exporters like China, Singapore, and South Korea.

I’m particularly interested in whether or not Geither is expecting sovereign wealth funds to be involved in this public-private partnership because of the role they had in "saving" a few big banks between November 2007 to January 2008. Read more →

Who Told Woodward of Impending Tax Problems Over 10 Days Ago?

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Nancy Killefer just withdrew her nomination to be OMB’s Chief Performance Officer because of tax problems. That makes three top Obama appointees–Tim Geithner, Tom Daschle, and Killefer–who seem to be discovering tax problems rather late in the game.

But of course, someone had already discovered these problems at least ten days ago–or that’s what I assume from this Woodward clip from January 25. At that point, Woodward (in his inimitable "I used to be a journalist but now I’m just the world’s best paid gossip" way) was already predicting we’d see more tax problems beyond Geithner (and, of course, we’re still waiting for the nannies). 

So who told Woodard? Does he have a mole in the Obama vetting process? Why would Obama’s vetters pick Woodward, of all people?

Or is Woodward getting this stuff from somewhere else, perhaps from some of his crack (ha!) sources in the Bush White House?