Is the U.S. Hiding How it Bailed Out AIG and Goldman?

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Bloomberg News reports that Congressman Darrell Issa (R-Calif.) subpoenaed a document that makes it clearer how the U.S. Treasury may have used struggling insurer American International Group (AIG) as the vehicle for bailing out Goldman Sachs Group (GS). This document, which had been previously hidden, details the mortgage-backed securities on which Wall Street banks bought $62.1 billion in insurance from AIG.The details in the document released are significant. They disclose how the securities performed, with losses exceeding 75% of their notional value in some cases. Compounding this, the document and Bloomberg data demonstrate that the banks that bought the swaps from AIG are mostly the same firms that underwrote the CDOs -- collateralized debt obligations -- in the first place.

Were the CDO underwriters merely engaging in prudent hedging by purchasing CDSs -- credit default swaps -- for the securities? Or were they creating the CDOs knowing that the insurance against their decline would be hugely valuable because the underwriters understood what was inside them? These are reasonable questions for Congressional investigation.

What is so painfully obvious here is that it will take some intense effort to get the details of what happened out into the public. Clearly, there was a concerted effort made to bottle up the facts of what caused the financial crisis. This document simply provides the basis for what ought to be more questions asked of all the participants. And my hunch is that those questions will not be asked and answered as long as the people who were involved in the decision are still in power.

As I posted, the name that comes to mind is that of then-head of the New York Fed, Timothy C. Geithner, who is now Treasury Secretary. He has already escaped unscathed from an effort to link him to the effort to keep quiet the payments made from AIG to Goldman and a host of other foreign and domestic banks at 100 cents on the dollar.

If the U.S. was serious about investigating this situation, it would identify the 100 biggest transactions that led to the financial collapse. For each of these transactions, they would get answers to the following questions:

  • Which institutions were involved in the transaction?
  • How much did they invest in the deal?
  • How did they finance the investment?
  • How did they hedge that investment?
  • How did the value of the investment change between the time it was initiated and the fall of 2008?
  • What happened to the value of the hedges?
  • What was each firms' net profit on the transaction?
  • How much of a bonus did the people who did the transaction actually receive?
If there is any hope of understanding what actually caused the financial crisis and keeping it from happening again, the American taxpayers need this kind of in-depth investigation of what caused it.

This torturous, delayed release of critical evidence to keep those involved from embarrassment is not in America's best long-term interest.
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