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Sun Mar 17, 2013, 01:06 AM

The AIG Bailout, Part 3. Negotiations.

Barofsky paints a devastating portrait of Geithner's deference to Wall Street in his account of the "negotiations" on the price that the government would pay the banks for the toxic CDOs that AIG had insured.

Even worse than the bonus payments, at least in terms of financial cost, was the subject of our other AIG audit, which explored the reasons for Geithner's agreement to effectively pay full value to the banks for the CDOs the government purchased from them. These beneficiaries included Societe Generale ($16.5 billion in CDOs bought), Goldman Sachs ($14 billion), Deutsche Bank ($8.5 billion), Merrill Lynch ($6.2 billion), UBS ($4.3 billion), Wachovia ($1 billion), and Bank of America ($800 million). Our audit sought to find out why Geithner hadn't negotiated a lower price on behalf of the public.

On its face, it seemed unfair and unnecessary that the government would so grossly overpay for the bonds, particularly to those banks that had already received so much TARP money. The New York Fed, obviously aware of this problem, did initially seek some concessions from the banks, asking them to take less than full payment for the bonds. But we found that these negotiations were halfhearted at best and demonstrated a characteristic deference to the banks, taking an almost apologetic approach. It was as if the New York Fed found the whole process of negotiating unseemly.

If Paulson, Geithner, and Bernanke's discussions with the banks over CPP {the Capital Purchase Program} were a lesson in Negotiations 101, Geithner's approach to concessions in the CDO purchases was Neville Chamberlain-esque. Instead of gathering the CEOs of the banks together in one room and personally explaining that it was "for the good of the country" and necessary to ensure ongoing support for the bailouts to negotiate a deal that fairly protected the taxpayers' interests, Geithner handed the job over to midlevel New York Fed staffers. The staffers were then required to use a prepared script that emphasized, up front, that any concession made by the banks would be "entirely voluntary." He also put the staffers into negotiating straitjackets: they were prohibited from suggesting that they would pull the plug on AIG and leave the banks high and dry; and they were prohibited from using their leverage from being the regulator of several of the entities. That approach resulted in a departure from the normal workings of the marketplace, where concessions on debt owed by struggling companies are not uncommon. For example, in 2008, the bond insurer Ambac reportedly settled claims on $1.4 billion of mortgage-related CDOs that it had insured for Citigroup for about 60 cents on the dollar, and later settled with a number of other counterparties on $3.5 billion in mortgage-backed debt exposure for just $1 billion.

Geithner's team also undercut any chance for getting relief for the tax payer by deciding that no one concession would be accepted unless all of the banks agreed to the exact same percentage reduction. The New York Fed told us that for this reason, after the regulator overseeing AIG's French bank counterparties told them that it would be against French law to accept less than full value for the bonds, the negotiations effectively ended.

The story gets worse. Geithner avoids meeting with the auditors and Treasury fails to provide requested documents. One bank (UBS) offers a concession, but the offer is never used as leverage with the other banks and UBS receives full price for their CDOs even after offering the concession. The French law against accepting less than full value for the bonds turns out to be a less than insurmountable barrier...

AIG Bailout, Part 1: http://www.democraticunderground.com/111632333
AIG Bailout, Part 2: http://www.democraticunderground.com/111632332

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Reply The AIG Bailout, Part 3. Negotiations. (Original post)
hay rick Mar 2013 OP
KT2000 Mar 2013 #1

Response to hay rick (Original post)

Sun Mar 17, 2013, 02:04 AM

1. nothing less than corruption

that has left us with cynicism.

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