The banks needed a barber, not a masseuse

The financial rescue cop, Neil Barofsky, has decided to investigate why AIG was allowed to pay banks in full to close out claims on credit default swaps. I'm sure he already knows the answer -- because the government was negligent.

I brought this issue up a few weeks ago, after reading a column by former NY governor Eliot Spitzer. Spitzer asked:

Why did Goldman have to get back 100 cents on the dollar? Didn't we already give Goldman a $25 billion capital infusion, and aren't they sitting on more than $100 billion in cash?

... The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.

Now, finally, some in Congress are demanding an explanation. Here's one: In November, the Federal Reserve of New York, at the time run by your Treasury Secretary Tim Geithner, had the opportunity to negotiate with domestic and foreign banks and ask them to take a haircut on these CDS claims. From McClatchy News:

(Columbia law professor John Coffee says) "you could have asked everybody to scale down their expectations at least 10 or 15 percent, and that wouldn't have been discriminatory. And if you asked Congress, I think they would have been much more in favor of being discriminatory towards foreign banks, because this is funded with U.S.-taxpayer-funded dollars."

In bankruptcy, he said, the swaps might have been settled at 20 cents on the dollar. In other words, the government had leverage and chose not to use it.

A reduction of 10 to 15 percent would've saved the taxpayers $2 to $3 billion, a small percentage of AIG's bailout haul, but still.

Barofsky can look into it all he wants, but it'll boil down to Coffee's correct analysis that Geithner's Fed was either timid, submissive to banks, sloppy or all three:

"So I think that there has been an absence of hard bargaining here, and it is because the Fed puts its highest priority on its loyalty to the banking system and tends to subordinate economizing with taxpayer dollars."


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