In Case You're not Clear About the Importance of the Giethner Story

In case you are wondering what the big deal is regarding our current Treasury Secretary's interaction with AIG while he was Chairman of the New York Federal Reserve Bank, here's a short explanation.

1. Background.

During the run up to the financial crisis, many of the Wall Street firms, including Mr. Geithner's former firm, Goldman Sachs, purchased Credit Default Swaps ("CDSs") from AIG. CDSs are, essentially, insurance policies on Collateral Debt Obligations. (CDSs differ from insurance contracts in important respects, but they serve a similar function). CDSs gaurantee that if the value of security, in this case a Collateral Debt obligation, falls below a certain value, the issuer of the CDS, in this case AIG, will pay the "insured" party a negotiated payout.

Collateral Debt Obligations ("CDOs") are securities comprised of groups of mortgage loans made to individual home owners. CDOs were a very desirable investment because the US mortgage industry was very stable - until 2007 the mortgage default rate was very small. Because CDOs were so desirable, there was a high demand for them among the world's investors. This demand was met by mortgage companies lowering their lending standards and loaning to people who could not really afford the homes they were buying - the mortgage companies did not care because they would - after collecting their fees - sell the mortgages to brokerages who would turn them into CDO's and sell them to unwary investors. The brokerages figured out ways to package the CDOs so that the true risk was hidden and the rating agencies failed to inform the public about the real risk.

Additionally, around the year 2000, our Congress, at the behest of then Senator Phil Graham, passed a law deregulating capital and disclosure requirements for CDSs. As a result, a huge worldwide market for CDSs (insuring CDOs) was created. These, too, were sold to unwary investors. This phenomenon reinforced the demand for mortgage loans.

Financial experts sounded grave alarms, but they were ignored. All was well and good. The housing market boomed. Housing prices kept rising. As the prices of housing increased, existing homeowners cashed out their newly created equity. This caused our overall economy to grow robustly as a result.

Then, over a period of time, the variable interest rate mortgage loans that had been made to poor people during the boom began to reset at higher interest rates. When these borrowers started defaulting on their mortgages, the value of the CDOs plummeted. This, in turn, wiped out the issuers of CDS's, who were not required to capitalize these instruments - as insurance companies are required to capitalize policies. Thus, in short order, the bursting of the housing bubble wiped out the issuers of the CDS's and the holders of the CDO's. That is, it wiped out AIG and most of the Wall Street firms.

In response, US tax payers, led by our elected government, jumped in to save the financial system.

With me so far?

2. Geithner's Actions

Under president Bush, the taxpayers extended AIG a $306,000,000,000.00 line of credit. That's right, a $306 Billion dollar line of credit. (So far, they have only accessed $182 billion of that money). AIG then used a good chunk of that money to make good on its obligations to the Wall Street firms, including Goldman Sachs.

In a secret deal, apparently at the insistence of the New York Federal Reserve, AIG agreed to buy many of the CDO's held by the Wall Street firms, including Goldman Sachs, at 100% of the price the investment banks had paid for them. AIG purchased these assets despite the fact that no one knew their actual market value and, at best, their actual market value was a small fraction of their original value.

Why is that so bad? Because this was essentially a multi-billion dollar gift of tax payer money to the Stockholders of the Wall Street firms, including Goldman Sachs - a gift for which the taxpayers got absolutely nothing in return.

The standard protocal for dealing with a bankrupt financial institution is for the government to seize control of the institution, wipe out the shareholders (who are already wiped out), purge the institution's toxic assets, recapitalize the bank, and then sell the institution to private investors. In this case, the New York Federal Reserve bank secretly arranged to give ten's of BILLIONS of your tax dollars to the private stockholders of the Wall Street firms, including the then New York Federal Reserve Bank Chairman and now US Treasury Secretary Timothy Geithner's old firm, Goldman Sachs.

Your Money! Your children's money! Tens of Billions of dollars of it. Secretly given to private investors under the auspicious of "saving the financial system." No congressional oversight1 No public announcement! No concessions on lending in return!

Goddammit!

And Giethner (or an underling) then instructs AIG not to disclose these purchases in a required regulatory filing with the Securities and Exchange Commission. He instructs them to break the law in order to keep his gift to the Wall Street stockholders a secret. And he's our fucking treasury secretary!

It is hard to communicate how angry I am about this. But I'm also worried by the fact that most Americans either don't know, or understand, or care that tens of billions of their tax dollars were given to some of the wealthiest people in the world to save them from their own folly - folly that created the worse recession in the US since the Great Depression.

The greed and avarice of these people - the same people who have created untold misery among the American population - is absolutely breathtaking. This may be the biggest rip off in the history of the world.

This is an egregious abuse of power. Geithner belongs in jail. All of these men belong in jail.

Joe H.