Before Timothy Geithner was the Secretary of the Treasury of the United States, he was President of the New-York branch of the Federal Reserve. It’s largely considered one of the top positions within the Fed, behind the chairman, Ben Bernanke.
Back in 2008, Timmy was running the show on Wall Street. The NY Fed was well aware of the issues all the banks were having and everyone involved knew the repercussions bank failures would have on investor confidence and main street in general.
AIG was in the middle of the whole thing. I’ve taken the liberty of simplifying the story but have included the original article from Bloomberg responsible for all these revelations and a summary article from the Washington Post.
AIG owed banks money for some mortgages that had gone sour. Basically, AIG sold the banks mortgage insurance so when the mortgages went bad the banks came calling. AIG didn’t have enough money to pay all the banks, and so bankruptcy would have protected them from having to pay the total amounts of money they owed. Capitalism at its lowest, but capitalism nonetheless.
In circumstances such as this the banks could expect to get some of the money they were owed, but not all of it. Terms of such payouts are negotiated between interested parties or in bankruptcy court. The banks could expect to get a percentage, usually expressed in terms like 50 cents on the dollar (or 50% of what is owed). In this case, the goal was 40 cents on the dollar.
But in steps the government. They keep AIG out of bankruptcy by loaning them (our) money. Apparently, in this arrangement either the government sucks at negotiations or simply didn’t try to save the taxpayer some money. AIG payed 100 cents on the dollar for the money owed to these banks.
It is absolutely true that the banks legally had a right to all the money. But for 99% of the world when you have a claim against someone and they don’t have the money, you don’t get your money. Many people feel that what effectlively happened here was the government bailed out Wall Street before the TARP program was even a sticky note on a Congressman’s ideapad.
The weakest part of this whole story is everyone got all pissy about the few hundred million AIG paid out in bonuses, but no one seems to care that we overpaid Wall Street by $13 billion in this transaction. And if you think for a second AIG is going to pay us back for the hundreds of billions we loaned them then you’ve got some good hash from your dealer. I’m not outraged at secret government dealings or wasteful spending, I’m once again pissed at the American public for picking the wrong battles.
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. |
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So how do Americans fight back? Contacting reps in Congress gets you a nice form letter that just thanks you for your interest, then puts you on the mailing list for their next survey or plea for $$.