AIG: Time for Treasury Secretary Geithner to Clean Up the Mess
Courtesy of rcwhalen, writing at Zero Hedge
Over the past several weeks, the news has been filled with reports about the likelihood of taxpayers recovering their investment in American International Group (AIG). We wrote about the AIG bailout in The Institutional Risk Analyst a great deal over the past two years, most recently in ‘The AIG Rescue: What Did We Bail Out and Why?’, March 22, 2010. Our contributor Richard Alford then opined:
“Why did the Fed let itself be put in the position where it became expected to act as a bankruptcy court and a supplier of capital to private insurance concerns? And why did we bail out the operating and capital deficits of AIG, deficits which suggest the same type of questionable accounting maneuvers and regulatory arbitrage as was seen in the Lehman Brothers collapse. If a bailout of AIG was better than bankruptcy, how would we know?”
How indeed. Part of the problem with the AIG situation as well as the other “investments” made by the Fed and Treasury in assets from the failure of Bear, Stearns, is that Treasury Secretary Geithner has not yet done the right thing and asked Congress to clean up his mess. The reasons for this reluctance are obvious now barely over a month before the mid-term election. And Tim Geithner’s latest efforts to window dress the AIG situation stem from the same political motivations.
The fact is that the “loans” by the Fed to AIG were really private equity investments and thus illegal under the Federal Reserve Act. Under the new Dodd-Frank law, the Fed could not make these advances at all. Thus the first step to getting this situation in order is to recognize that the stakes in AIG as well as the assets acquired from Bear, Stearns prior to the acquisition by JPMorgan Chase are illiquid, long-term investments that are inappropriate for the balance sheet of the U.S. central bank.
The Treasury should issue debt to the Fed in exchange for these assets and the ownership would ultimately shift to the Federal Financing Bank (FFB). The FFB is the part of the Treasury that ultimately holds all financial investments by the government, including the stakes in AIG, General Motors and Citigroup.
The FFB is the appropriate place for these assets to be house, managed and eventually disposed of, but there should be no hurry. To paraphrase Jesse Jones, head of the Reconstruction Finance Corporation in the Great Depression and WWII, in this case “time is our friend.” And Secretary Geithner has private advisers and even the FDIC available to assist in managing and disposing of these assets.
Rather than trying to achieve some illusory political game by moving forward with another pretend scheme for the disposal of the stake in AIG, a scheme dreamed up in a hasty and ill-considered fashion, Secretary Geithner and the White House should start with a small but very important step, namely to reorganize the public stakes in AIG and other firms now held by the Fed.
This first step will show the American people that Washington is starting to take some significant and purposeful steps toward the restructuring which still must occur in the financial sector. Fannie Mae, Freddie Mac and the FHA will be next. And it will show the world that the American people are starting to take ownership of a problem we all helped to create. Once the Treasury is fully in control of AIG, then Secretary Geithner and Congress can deal with the entire public portfolio of troubled companies in a unified and transparent fashion.
If you accept that situations such as AIG and other cases where Buy Side investors (and, indirectly, the US taxpayer) were defrauded through the use of public bailouts of firms like Goldman Sachs and JPMorgan, then key first step to restoring sanity to public policy is to remind Americans that central banks are not supposed to use used for subsidies nor for making private equity investments. Dodd-Frank properly puts the responsibility for bailouts with the Treasury and that is a point that the President and the Treasury Secretary need to emphasize and take credit for winning. But only hindsight is 20/20.
Ben White wrote in Politico this week:
“Sources tell Morning Money that the Fed, Treasury and AIG are very close to a deal that would dramatically cut the government’s exposure to the insurer-from $180 billion at its peak to $70 billion-and would accelerate repayment to taxpayers… If this deal comes through it would be a HUGE win for Treasury and make serious criticism of TARP even more difficult…”
The problem facing President Obama and Secretary Geithner in AIG is not merely avoiding public criticism due to the cost of the bailout. The more profound issue is that the more time which is wasted temporizing and avoiding the key issue of restructuring, the deeper the fiscal hole facing future generations. Tim Geithner and Barack Obama should stop worrying about the voters and start worrying about the history books. And they can show people that they are serious about the nation’s financial crisis by starting with cleaning up the AIG mess.
