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Geithner, Bailouts, and the Financial Crisis

Geithner, Bailouts, and the Financial Crisis

The AIG bailout is one of the largest redistributions of wealth from ordinary taxpayers to bigwig bankers in history, one in which current Treasury Secretary Timothy Geithner played a key role. Newly uncovered emails reveal that Treasury Secretary Timothy Geithner’s New York Federal Reserve office urged AIG to conceal key information about the bailout from the Securities and Exchange Commission.

If Geithner was involved in those decisions, he could face charges of securities fraud. As John Nichols explains for The Nation, the quality of Geithner’s judgment is no longer in question—we already knew he committed plenty of errors while negotiating the AIG bailout as president of the New York Federal Reserve. The question now is whether Geithner needs to be prosecuted for misleading federal regulators.

AIG bet on the housing market with credit default swaps, a new form of financial derivative that helped the company score big profits during the housing boom. But when the market tanked, the company couldn’t cover its losses. AIG’s housing market gambles were completed with help from some of the largest banks in the world, including Goldman Sachs, Merrill Lynch, Bank of America, and Citigroup. If AIG had filed for bankruptcy in September of that year, those banks would have been required to accept much lower payouts on those bets—as little as 10% of their face value.

Instead, when the government swooped in to save AIG, the banks ended up with amazing deals. As a chief negotiator in the AIG bailout, Geithner allowed Goldman and others to receive full payout at 100 cents on the dollar. That meant U.S. tax dollars were going to the banks with no strings attached. But Geithner refused to tell the public which banks were benefiting from the bailout for almost six months. He finally relented when the AIG bonus outrage boiled over in March.

Last week, we learned the most damaging development yet: Geithner’s New York Fed urged AIG to keep the SEC in the dark about its sweetheart deals for the banks. Withholding key information from the SEC can be a criminal offense, and if Geithner was involved in the push to mislead the SEC, he must be held accountable.

For now, the Obama administration is standing by Geithner, saying that the decision to pressure AIG against cooperating with the SEC “did not rise to his level at the Fed” last Friday. But as Mike Lillis notes for The Washington Independent, that explanation strains credulity:

The federal government had recently bailed out AIG to the tune of $180 billion; AIG was funneling that cash to other (already bailed out) Wall Street giants; the New York Fed was telling AIG not to disclose those payments; and that decision didn’t rise to the level of the Fed chairman?

Lately, the government hasn’t had a very good record on prosecuting financial crime. Prosecutors wouldn’t have uncovered a massive tax evasion scheme at Swiss banking giant UBS without the help of whistleblower Bradley Birkenfeld. And the tax fraud was indeed massive—the Justice Department believes that UBS illegally helped shield over 19,000 wealthy clients from paying taxes.

But, as Amy Goodman reveals for Democracy Now!, in return for uncovering the biggest tax fraud in history, the Justice Department has successfully pushed to have Birkenfeld jailed for more than three years. By contrast, almost everyone involved in the scam is getting off with fines, probation, or less. What signal do you think this sends to other potential whistleblowers?

The housing boom encouraged banks to pour money into speculative investments outside the traditional mortgage market, especially by making loans to property developers to build high-end condominiums. When the housing bubble burst, it became clear that there were far more fancy condos than anybody wanted. Today, most economists expect the loans that financed these developments to prove nearly worthless.

As Alyssa Katz details for The American Prospect, scores of those buildings are now nearly vacant in New York City alone. In order to create these useless towers, developers cleared the land by forcing out tenants in affordable housing complexes, and shut down productive businesses. If these spaces are to be used productively—say, for affordable rental housing—banks and developers need to acknowledge that their market has tanked, accept their losses and move on.

Instead, Katz notes, federal regulators are letting banks apply very optimistic accounting values to these commercial real estate projects. This accounting creates illusory short-term profits for banks and eliminates incentives to let the land go to socially useful enterprises. If regulators don’t force banks to get serious about their commercial real estate losses, the government will effectively be subsidizing a rash of useless eyesores, allowing neighborhoods to decay in the process.

Subprime shenanigans from AIG, UBS and other banks helped tank the global economy. We’re still feeling the job fallout from a financial crisis that banks triggered over two years ago. Last week, the government reported that the economy lost 85,000 jobs in December, while the unemployment rate held even at 10%. David Moberg explains why we desperately need the Senate to approve a robust jobs bill in a blog for Working In These Times. A $174 billion package passed the House last month, but it’s a pittance compared to what the government has pledged to save Wall Street.

So how did we get here—saving the crooked jerks who created the mess while leaving everyone else out to dry? Kevin Drum’s story in Mother Jones on the bank lobby offers critical insight into the operations of the U.S. democratic process, and also stands up as one of a handful of investigative journalism masterpieces that have stemmed from the financial crisis. In the last dozen years, elite financiers have secured government approval to shoulder greater risks and pay bigger bonuses, despite a series of near-catastrophic financial market failures. Drum details the financial industry’s pervasive influence over lawmakers in Congress, key policymakers at the Federal Reserve and federal regulators in other agencies, influence often purchased outright with campaign contributions and massive lobbying efforts.

These days, the money still talks in American government. But the true economic coup is not financial. It’s ideological: Bankers have convinced leaders of both political parties that what’s good for Wall Street is always good for America, even if the cost of boosting the bottom line involves dismantling productive firms, ravaging neighborhoods with foreclosures or scamming poor people with massive overdraft fees.

“…There’s more to the finance lobby than just money and political influence,” Drum writes. “Their real power lies in the fact that they’ve so thoroughly changed our collective attitude toward financial regulation that sometimes they barely need to lobby in the traditional sense at all.”

This is precisely how we got stuck with banker apologists like Geithner, a Justice Department that punishes whistleblowers while letting corporate crooks go free, and why we’re allowing neighborhoods to rot away for no reason. We have to demand more from our government, regardless of which party is in power. If we don’t, we’ll get stuck with the same save-Wall-Street-first policies forever, regardless of the consequences for society.

This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. This is a project of The Media Consortium, a network of leading independent media outlets.



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Mike Licht, Notion's via Flickr/creative commons
By Zach Carter, Media Consortium 

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12:57AM PST on Feb 19, 2010

noted thanks

12:53AM PST on Feb 19, 2010

noted thanks

4:19PM PST on Jan 17, 2010

TERRANCE N. - Sorry to inform you but your facts are skewed. First off Clinton left a budgeted surplus, but the Federal Debt was still there. For that matter, the debt has been around going back to WWI, and before.

Second, In referencing Katrina, Kathleen Blanco and Ray Nagin are responsible for the deaths that occurred in New Orleans. They had the opportunity to get those people out of harms way. Instead they chose to let them drowned. The city should have been evacuated. On average it is 8' below sea level , and a deep as 18' below sea level. The warning was issued as soon as the storm left the Florida coast. As well at one point that storm filled the entire Gulf of Mexico. Then you add to the fact that they built their houses flat on the ground with not even a 6" rise to get into the house, and they still are. The fact is, you do not play chicken with nature. A 17' wall of water in your backyard, and a storm coming pushing another 21', you get out of the way. In Florida, we order evacuations in such cases and our land is above sea level.

As for Ron Paul as President, that would screw both parties. That I will agree.

1:15PM PST on Jan 17, 2010

Even with the eneptness and lack of backbone shown by too many democrats, I could never bring myself to vote for any republican, with the possible exception of Ron Paul.

When the Clinton administraton left office, they left the republicans with a surplus. Bush said, "it's the peoples money" and preceded to give tax cuts to the rich. Bush then started a costly war based on false pretenses and pursued policies of deregulation that brought us to the brink of collapse.

Obama ran on change, transparency, bringing back jobs to the middle class from over seas, fixing our infrastructure, and having regulations on lobbyist. For some reason he didn't think that people would remember these promises.

Obama and the democrats have taken their base from granted. They are paying for this as we speak. On the other hand, the current republican party made up of people like Palin, Hannity, Limbaugh, and O'reilly will destroy what's left of this country. They cannot govern; witness Katrina, Iraq, and all of the other scandals that took place in the last eight years.

5:42PM PST on Jan 16, 2010

the democracy now article on birkenfield is very telling, the whistleblower gets jail, the rest is left off the`s the same in my country grasser our last minister of finance is involved in so many scandals,he just seems to getaway with it,no matter what`s being revealed. i agree with stephen colbert it`s time for the pitchforks.

9:57AM PST on Jan 15, 2010

AIG advertises itself so widely in Poland....

4:47AM PST on Jan 15, 2010

Great Article!!! What is a shame is that if you have or have access to large sums of money, you can get what it is you want, no matter what the price is to those who have small sums of money or none at all! Greed has put this country in dept!!!

9:46PM PST on Jan 14, 2010

Elsie Wilson,

What you have mentioned, has been discussed for years. Congress continues to sidestep the issue and the people do not care. The only concern appears to be short term cash flow and to hell with tomorrow. Corporations were paid to move over seas. Free money given to China allowed it to grow. The first sign of problems they will relocate operations to Africa or South America to exploit the cheap labor and no regulations. Credit will be the next disaster followed by another round of foreclosures. Banks are hoping for a something to happen so as not to show the amount of dead loans on the books. As well the Fed is in a "If we don't look, then we don't know." mind set. Currently, there are 4 houses on my block that are in foreclosure with no dates set for the proceedings. The banks can not afford to foreclose since they do not want to maintain the property. The problem is worst in condominiums. As for the tenant/owner, they have not figured that one out. Since the owner does not qualify for help since they own the property for more then 5 years. I guess they did not think the whole plan through when they hatched it. Banks, Corporations and Government were to busy feathering their own nests, they forgot to think about the one who pays the bills. Who would have guessed?

1:37AM PST on Jan 14, 2010

Who is surprised by these revelations? For ages, at least since 1929, the world has known that the U.S. financial system is utterly corrupt and that it has its politicians completely under its thumb. Why do you suppose that Manhattan was the primary target of 9/11 and that its military minions the secondary one? It is a plague on the face of the earth.

10:18PM PST on Jan 13, 2010

Elsie, your belief in the ability of government to achieve desirable outcomes is commendable in the face of what has been achieved in the last eighteen months. I would have thought that the appropriate Ameriacan capitalist approach would have been to let insolvent companies fall into bankruptcy. At least, it would have avoided the current problem of massive bonuses being paid to executives of banks that benefited from the AIG bailout. Furthermore the cleansing of the credit and housing markets may have cleaned up the economy instead of leaving a sick economy further burdened by the massive debts incurred by government and the threat to your currency occasioned by quantitative easing.

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