United Liberty

It is now long overdue. Treasury Secretary Timothy Geithner must resign his post. A story broke earlier this week on Bloomberg which details what appears to be an attempted cover-up by the Federal Reserve Bank of New York and AIG. Let’s take a quick trip in the time machine.

On September 15, 2008, Lehman Brothers filed for bankruptcy. This triggered a freeze in the credit markets, which, in turn, exacerbated a brewing crisis at insurance giant AIG. The Federal Reserve stepped in the next day with an $85M loan facility which effectively nationalized the company. This was not the end of the government’s largess. Additional credit lines were created by the Federal Reserve and TARP money was used to provide a capital infusion. Tim Geithner was President of the NY Fed during this time.

Two key controversies emerged over the following months. First, AIG awarded large bonuses to employees despite the massive failure of the firm. These retention bonuses were executed despite populist discontent and anti-bonus rhetoric from Obama. However, Geithner effectively shrugged his shoulders and said nothing could be done. Second, AIG settled credit default swap contracts at par (one hundred cents on the dollar). This was controversial since AIG was effectively bankrupt and the counter-parties would likely have received much less in either bankruptcy or any other rigorous renegotiation. Again, Geithner effectively shrugged it off.

Chrysler will not pay the $7+ billion it owes to taxpayers:

Chrysler LLC will not repay U.S. taxpayers more than $7 billion in bailout money it received earlier this year and as part of its bankruptcy filing.

This revelation was buried within Chrysler’s bankruptcy filings last week and confirmed by the Obama administration Tuesday. The filings included a list of business assumptions from one of the company’s key financial advisors in the bankruptcy case.

Some of the main assumptions listed by Robert Manzo of Capstone Advisory Group were that the Treasury would forgive a $4 billion bridge loan given to Chrysler in the closing days of the Bush administration, a $300 million fee on that loan, and the $3.2 billion in financing approved last week by the Obama administration to fund Chrysler’s operations during bankruptcy.

According to JP Morgan’s CEO, Jamie Dimon, the financial giant can immediately return TARP money to taxpayers , but his company is waiting on the government:

Dimon, calling money received through the Troubled Asset Relief Program “a scarlet letter” and “the TARP baby,” said on a conference call with reporters today that the New York- based bank is awaiting guidance from the U.S. Treasury Department. “We could pay it back tomorrow,” he said.

Rep. Barney Frank (D-MA) wants to regulate salaries of workers from banks and financial institutions that received TARP money:

Treasury Secretary Timothy Geithner may not want to think out loud like this:

The dollar fell briefly on Wednesday after Tim Geithner, the Treasury secretary, appeared to suggest that the US was open to exploring a Chinese proposal to reduce reliance on the dollar as the world’s reserve currency.

Mr Geithner told the Council for Foreign Relations that he had not studied the proposal by Zhou Xiaochuan, Chinese central bank governor, for greater use of special drawing rights – a synthetic currency maintained by the International Monetary Fund that represents a basket of actual currencies – in global reserves, but added: “We are quite open to that.”

He said increased use of SDRs should be thought of as an “evolutionary” step rather than a step towards “global monetary union”.

Yesterday, the details of Geithner’s new plan to address the banks’ toxic assets was released. He also penned an op-ed in the Wall Street Journal and appeared on CNBC (not sure of other media appearances). The U.S. Treasury website has also released a wide array of information regarding the plan - this is a good place to start if you want to read some of it.

Today Treasury Secretary Geithner unveiled Washington’s latest creation, and well, it is nothing more than a repackaging of the TARP program proposed last September. We here at United Liberty agree with the WSJ Marketbeat when they say “The New Plan Is The Same As the Old”-

The newest plan to undo the legion of toxic junk sitting on the balance sheets of the major financial institutions is, well, the same old junky plan. First there was the M-LEC, a Citigroup-proffered, Paulson-pushed plan to junk all of the junk. It was followed by the TARP, the modified TARP, the completely changed TARP, the GARP (Geithner Asset Relief Program), and now this amalgam.

And it relies on the same formula as all of the other plans — somehow getting the nation’s big financial institutions to accept the idea of selling off all of the stuff they’re holding on their books at a value that doesn’t stink for them, but somehow also satisfies the private investors who would be expected to buy into this mess of junk.

So who gets left out in the cold? The taxpayer, natch. According to the Wall Street Journal’s report, mortgage-backed securities will be purchased through several investment funds, and the government will act as a co-investor, matching private investments on a dollar-for-dollar basis. For bad loans, the government could offer as much as 80% of the financing.

As one of our writers pointed out a month ago, this approach, which tries desperately to avoid the inevitable pain, will only exacerbate and prolong the crisis.

It seems this reaction from Washington over the AIG bonuses is nothing than an act, considering the Obama Administration knew about them well in advance:

For all of the furor since details of the bonuses became public over the last several days, the issue of retention payments to A.I.G. employees globally has been percolating publicly since A.I.G. was bailed out in mid-September. About $1 billion in retention payments for 2008 and 2009 are in question, but the controversy involves about half of that, about $450 million over two years, that was intended for employees of A.I.G.’s financial products unit. That unit was the source of the financial derivatives blamed for the near-collapse at the heart of the economy’s downturn.

The Treasury and Federal Reserve officials said they had known about the bonus program as far back as last fall.

Shudder to think.

Yes, I just read a recent op-ed from Krugman - available here. I have to say, for the most part, I agree with him completely in this article. The Obama administration, in concert with the Federal Reserve, continue to “dither” along - avoiding the “bold action” which has been promised.

When I think of the potential for future inflation from the combined current actions of the Treasury and Federal Reserve, I need a little comic relief.