Fallout: The Financial Crisis

Did Geithner do right by AIG?

Marketplace Staff Nov 17, 2009
Fallout: The Financial Crisis

Did Geithner do right by AIG?

Marketplace Staff Nov 17, 2009


Kai Ryssdal: The facts before us, ladies and gentlemen, are these. In the hustle and bustle of last fall, the federal government spent billions of dollars bailing out AIG. Some of those billions went straight to companies with whom AIG had made, in essence, side deals. A report out today from the TARP Inspector General Neal Barofsky says the government didn’t do all it could to save taxpayers’ money on those deals last fall. Facts, though, are nothing without a little bit of context. And for that, we turn to our senior editor Paddy Hirsch. Hello Paddy.

PADDY HIRSCH: How are you doing?

Ryssdal: I’m all right. Listen, do me a favor and take us back to those days and remind us what the beginning of this story is.

HIRSCH: All right, I’ll take you back to September 15, last year, that’s when Lehman Brothers collapsed. The next day AIG looks like it’s about to go under. And the government steps out with a big, fat $85-billion bailout. Essentially the same problem. It was a money problem. Lehman Brothers didn’t have enough money to operate, it couldn’t get enough money in the door. AIG didn’t have enough money to pay out the door, it needed to pay people for these contracts that it had written, and it just didn’t have the cash on hand.

Ryssdal: These credit default swaps that we all heard so much about.

HIRSCH: Exactly, these are the credit-default swaps. This animal, this type of insurance contract that AIG had written, and because of the way that the contract was written, if certain things happened like AIG’s credit rating fell, or the underlying securities credit rating fell, or they fell in the market, AIG had to pony up more cash to the banks that had asked for the insurance, and it had to keep on paying that money out. And it looked like it just wasn’t going to have enough money to be able to operate.

Ryssdal: So what happened between the day of that bailout and then November-ish when the New York Federal Reserve gets heavily involved?

HIRSCH: Well, you know the New York Fed was involved from the very beginning there because it came up with that $85 billion. So essentially Tim Geithner, who was then the head of the New York Fed, had to go out to the banks and sort of work out a deal. It had to say look, the best thing that we can do in order to solve this for AIG is to buy all the underlying securities. And so, can you guys help us with that? Can you cut us a deal? Because we’ve got this huge systemic problem, can you shave a little bit off the price there?

Ryssdal: And?

HIRSCH: And they said no.

Ryssdal: And that is the point of Barofsky’s report today. That the government just drove itself a bad, bad deal.

HIRSCH: Yeah, he said that basically Geithner should have negotiated better with the banks that he was dealing with.

Ryssdal: But help me out here. Geithner was the regulator for these banks. And this is Barofsky’s point. Couldn’t he just have gone to the banks and said, “hey, I’m in charge here, you will do this.”

HIRSCH: He had a couple of options. The first thing he could have done is say, look, if you guys don’t play ball with us, we’re just going to let AIG collapse, and then you’re going to lose all your money. But of course, he just bailed AIG out to the tune of $85 billion, and everybody knew that that wasn’t going to happen. So that was moot. The second option that he could have taken was to say look, I’m your regulator and unless you help me out and cut me a discount, I’m going to wave the big stick, and I’m going to hurt you somewhere down the line, you’re going to owe me, and you’re going to hurt if you don’t help me out now. But of course, if he had done that, we would be sitting here in a postmortem however months later, saying, eww, abuse of power, eww, terrible thing.

Ryssdal: Well, here we are now 14 months later doing a postmortem, what does this report tell us then?

HIRSCH: I think the report tells us actually that Barofsky feels quite sorry for Geithner. He kind of makes the point that all of Geithner’s protestations about why he couldn’t front up to the banks were actually pretty valid. And I think the one point that he does make quite lightly, but quite significantly, is that the Treasury and the Fed when they first got involved in this problem looked only at the private market for a solution. And then it turned out that the private market failed, and they needed to go to the public market. And I’m hoping that what will happen is that they’ll look at this situation in the future, and they’ll say, look we need a solution for both sides. We can’t just depend on the market. Sometimes the government’s going to have to step in, and if that’s the case, we need a template to make it happen properly.

Ryssdal: And just to take it out a little bit wider for a second, this is part of that broader financial regulation restructuring, right? As Congress thinks about banks that are too big to fail, and the whole regulatory oversight. This is all part of that.

HIRSCH: It is indeed. And you know, hopefully the people who are writing this legislation will take a good, close look at the front end of Barofsky’s report and draw the lessons from that. Because Geithner’s problems with the banks, and the criticisms that stem from that, all stem from this first problem that they went to the private market first, and they didn’t have a solution for a public solution.

Ryssdal: Our senior editor, Paddy Hirsch. Thanks, Paddy.

HIRSCH: It was a pleasure.

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