Hearing with Geithner and Paulson was more of political theater

By Biloxi

Yesterday's hearing at the Oversight and Reform Committee with Treasury Secretary Tim Geithner and Former Treasury Secretary Hank Paulson was nothing more than political theater with Congress. Congress grilled and sent Geithner to the woodshed in the AIG probe while Congress failed to ask the real tough questions to Paulson to Paulson's role in the collapse of AIG and why Goldman Sachs, his own firm, and Morgan Stanley made themselves a bank holding company after AIG collapse.

The question should be asked is to who criminally had financial gain into the AIG collapse as well as the financial crisis. While we know that NY Fed, Federal Reserve Bank and Dept. of Treasury played of role in decision making into the bailout of AIG, it is clearly from yesterday hearing that Congress is blaming Geithner as the mastermind and fall guy in the AIG mess, but not clearly connecting the dots with AIG collapse and the financial gain of AIG counterparties. There were a lot more people in NY Fed who were involved in bailing out AIG collapse other than Geithner.

Congress tends to forget that Bush gave Paulson the green light to bailout AIG.

From Huffington Post:

Describing President Bush's frustration with the incompetence of AIG's management, Paulson says that he convinced Bush to agree to bail out the giant insurer: "Like the president, I understood that we had to hold our noses and save the company in order to protect the frail financially system."

Yet, in Paulson's testimony, he still continued to claim that he had no role in decision making in the AIG bailout. While Congress is frustrated to why Federal Reserve bailed out AIG, Congress tends to forget the Commodity Futures Modernization Act of 2000. In December 2000, pressured by the banking lobbyists, the Senate passed the Commodity Futures Modernization Act, allowing the banks and brokerages to create insurance-type products. Banks and other financial institutions introduced insurance-like products called “credit default swaps.”

However, in the 2000 bill, most over-the-counter derivatives (“OTC derivatives”) transactions between “sophisticated parties” would not be regulated as “futures” under the Commodity Exchange Act (CEA) or as “securities” under the federal securities laws. The CFMA received criticisms for its treatment of credit default swaps and other OTC derivatives in the case of AIG bailout by the Federal Reserve. CFMA bill passed 377-4 in the House. Interesting that Rep. Ron Paul voted no. Click here.

Again, I will reinterate again: Congress needs to dig up the Financial Stability Oversight Board meeting on Sunday November 9, 2008 (see pic above) which the members of that board include Hank Paulson, Ben Bernanke, and Securities and Exchange Commission Chairman Christopher Cox:

Pg. 2 of the board meeting document:Members and officials alsodiscussed the effect of the continuingmarket turbulence and decline in the valueof mortgage-related assets on AIG, as well as the continuing potential risks tothe financial system and the broader economy that would result from adisorderly failure of AIG. Chairperson Bernanke, Mr. Paulson, and officials ofthe Federal Reserve and Treasuryexplained that the actions to be announcedwere designed to provide AIG a moredurable capital structure, address certainpools of assets and exposures that hadcontributed significantly to the liquidityand capital pressures of the company, andfacilitate AIG's execution of its plan tosell certain of its businesses in an orderlymanner with the least possible disruptionto the overall economy.

Pg.3

Treasury officials and Membersthen reviewed and discussed therestrictions that would apply to AIG underthe terms of the investment, includingrestrictions on corporate expenses,restrictions on lobbying, and limitationson executive compensation that wouldapply under EESA, as well as theadditional limitations that would apply tosenior executive compensation andbonuses.

Read the minutes. Click here.

Finally, here were the Federal Reserve Board's minutes of its funding differculties of AIG:

(September 16, 2008), the Board discussed the funding difficulties (sic) of American International Group, Inc., New York, New York. The evidence available to the Board indicated that AIG, a provider of a wide range of products for both institutional investors and consumers to protect against casualty and financial losses, had experienced a rapid and extreme liquidity shortage. Available evidence also indicated that the company faced the imminent prospect of declaring bankruptcy….

….Given the unusual and exigent circumstances, the Board authorized the Federal Reserve Bank of New York under section 13(3) of the Federal Reserve Act to extend credit to AIG or any of its subsidiaries, in an amount up to $85 billion, if the New York Reserve Bank obtains evidence that the borrower is unable to secure adequate credit accommodations from other banking institutions.

Click here to read more.

Bernanke, who voted on the board authorized Fed of New York. By the way, the Federal Reserve Bank of New York is one of the 12 Federal Reserve banks.