What Barack Obama Needs to Know About Tim Geithner, the AIG Fiasco and Citigroup

[SlowDownFast]

Disclosure and warning: The commentary and link below are from the website of a financial consultant business.

Below is an excerpt from the commentary. I posted only this excerpt for efficiency of summation, copyright, etc. I recommend reading the whole article. I happen to agree wholeheartedly with his analysis on this and have been making a "stink" lately (largely to no avail, it seems) on DU about Obama's appointment of Geithner based on his ties to the Fed and TARP.

The whole commentary can be found at:
http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=325

What Barack Obama Needs to Know About Tim Geithner, the AIG Fiasco and Citigroup
November 24, 2008


SNIP

If you look at how the Fed and Treasury have handled the bailouts of Bear Stearns and AIG, a reasonable conclusion might be that the Paulson/Geithner model of political economy is rule by plutocrat. Facilitate a Fed bailout of the speculative elements of the financial world and their sponsors among the larger derivatives dealer banks, but leave the real economy to deal with the crisis via bankruptcy and liquidation. Thus Lehman, WaMu, Wachovia and Downey shareholders and creditors get the axe, but the bondholders and institutional counterparties of Bear and AIG do not.

Few observers outside Wall Street understand that the hundreds of billions of dollars pumped into AIG by the Fed of NY and Treasury, funds used to keep the creditors from a default, has been used to fund the payout at face value of credit default swap contracts or "CDS," insurance written by AIG against senior traunches of collateralized debt obligations or "CDOs." The Paulson/Geithner model for dealing with troubled financial institutions such as AIG with net unfunded obligations to pay CDS contracts seems to be to simply provide the needed liquidity and hope for the best. Fed and AIG officials have even been attempting to purchase the CDOs insured by AIG in an attempt to tear up the CDS contracts. But these efforts only focus on a small part of AIG's CDS book.

The Paulson/Geithner bailout model as manifest by the AIG situation is untenable and illustrates why President-elect Obama badly needs a new face at Treasury. A face with real financial credentials, somebody like Fannie Mae CEO Herb Allison. A banker with real world transactional experience, somebody who will know precisely how to deal with the last bubble that needs to be lanced - CDS.

SNIP

President-elect Obama and the American people have a choice: embrace financial sanity and safety and soundness by deflating the last, biggest speculative bubble using the time-tested mechanism of insolvency. Or we can muddle along for the next decade or more, using the Paulson/Geithner model of financial rescue for the AIG CDS Ponzi scheme and embrace the Japanese model of economic stagnation.

[Marsala]

1. Insolvency didn't work so well with Lehman Bros.

Letting Lehman go under nearly took the entire financial system with it. Letting AIG go under would almost certainly do so.

[msongs]

2. Obama voted FOR the bailout, he is a member of the club nt

[GreenArrow]

3. Hell, he already knows that. Don't matter.

He needs to pick people who can get the job done.

[leftofthedial]

4. Geithner is every bit as insider, status-quo, pro-corporate, supply-side

(especially Wall Street corporate) as anyone who has served in the bush cabal. He's just much more competent than anyone who has served in the bush cabal, so I guess that's a kind of "change."

[ellacott]

5. It's interesting that you think he doesn't know this

Too funny.

[scheming daemons]

6. He knows this..... it's part of the reason he picked Geithner!

He can hit the ground running.


Obama was pro-bailout... remember?



:eyes: