The public wasn’t ever told the banks were asked to do their part. The law is deliberately vague and says the Fed can lend to virtually anyone in “exigent circumstances.” The Fed itself gets to define what that vague phrase means. The AIGFP division ended up incurring about $25 billion in losses. Obama came to office intent on restoring public trust in government.

It asks Fed leaders to get tough with their principal clients, when Congress didn’t have the nerve to do the same. For example, media reports indicated that Goldman Sachs Group, Inc. (NYSE:

Some financial firms are simply “too big to fail,” it seems; Washington will not let them collapse, no matter what the president claims.

The New York Fed immediately hired him as its own lawyer and proceeded to do what the bankers had refused to do—bail out AIG. The central bank, with its high sense of rectitude, would insist it represents the public interest. By using this website, you consent to our use of cookies.

Bank examiners are chastened, told to back off. We saw how that happened in the AIG story when the bankers called Geithner’s bluff, after which he retreated obediently. But in the late 1990s, the AIGFP discovered a new way to make money.
Any holdouts could be “named and shamed” and held up for public scorn—as bankers who accepted public bailouts but refused to do their part. Now it was aggressively collecting on its bet. That Monday morning, Geithner summoned representatives from Goldman and the JPMorgan bank to Fed offices and told them to organize a private-sector consortium of major lenders to provide the emergency liquidity loans that would keep AIG afloat until things settled down. These qualities might conceivably be bleached away with fundamental reform of the venerable institution. As the New York Fed pumped more money into AIG, the insurance giant pumped it right out the door to satisfy the demands from counterparties like Goldman Sachs.

If the bankers refused to participate, the Fed had to move fast to stanch the bleeding. A broad panic raced around the world, freezing credit markets, collapsing financial assets and bringing down major institutions. This could have been avoided, the report argues, if the Fed had listened to disinterested advisers with a less parochial understanding of the public interest. This quality was most clearly demonstrated in the choices it did not make. The AIG operation became a gigantic spigot for circuitously distributing public money to private banking interests. The taxpayer bailout followed. However, customers of AIG's traditional business weren't at much risk. If the Fed acts in a prompt fashion to curb or punish reckless behavior before it get dangerous, the bankers will accuse it of stifling profit and progress. But other gamblers—the counterparties in AIG’s derivative deals—were made whole on their bets, paid off 100 cents on the dollar.

The arrangement was not illegal and not unethical, given the precious distinctions the legal profession makes on ethics. Later, the terms of the deal were reworked and the debt grew. Warehousing is involves purchases of loans or bonds before closing on a CDO issuance. Timothy Geithner told panel members he does not think it is the Federal Reserve’s role to use the tools at its disposal to induce the banks it regulates to do something they do not want to do. The AIG bonus payments controversy began in March 2009, when it was publicly disclosed that the American International Group (AIG) insurance corporation was going to pay approximately $218 million in bonus payments to employees of its financial services division. Once it was determined that the company was too vital to the global economy to be allowed to collapse, a deal was struck to save the company. Typically they will settle for less to avoid the enormous costs and delay of long-running bankruptcy litigation. The Fed could not force them to accept, but it could make refusal very awkward. For longstanding reasons, it has lacked the will. Panicky credit markets were seizing up. The episode is relevant to the future, because Geithner is now Obama’s Treasury Secretary and in charge of preventing the next taxpayer bailout. The Fed had no direct regulatory authority over it. Huebner later also became Treasury’s lawyer when it added TARP funds to AIG, though the Fed and Treasury do not have identical interests. The Fed saw nothing wrong with it. If some banks are too big to fail, then government should compel them to become smaller banks. Bankers will be bankers. As the mortgages tied to the swaps defaulted, AIG was forced to raise millions in capital. AIG lost its bets, which led to its collapse. This time the Fed did not even try. Nor did Geithner threaten to pursue an alternative strategy that could have forced the banks to negotiate the terms. This, in turn, lowered AIG's credit rating, forcing the firm to post collateral for its bondholders. Systemically Important Financial Institution (SIFI) DefinitionWhy Investors and Credit Card Holders Need to Know Counterparty Risk

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