Keeping an Eye on the (Goldman Sachs) Prize

Not surprisingly, most of the questions directed at Fed Chairman Ben Bernanke and Treasury Secretary Timothy Geithner at this morning's hearing before the House Financial Services Committee were focused on one of two issues: 1) why the government failed to place restrictions on the AIG retention bonuses, and 2) what the government can do to regulate institutions like AIG in the future so that they don't become "too big to fail."

But we were glad to hear a few committee members press Bernanke and Geithner on the issues we raised in our March 12 letter--namely, that a lack of transparency in the AIG bailout had created an appearance of favoritism toward Goldman Sachs and other counterparties.

Although he did his best to avoid the question, Geithner eventually admitted to Ranking Member Spencer Bachus (R-AL) that the counterparties were paid back 100 cents on the dollar on what AIG owed them, despite the fact that they had knowingly entered into extremely risky credit-default swap contracts with the insurance company. Geithner--who played a central role in the AIG bailout as president of the New York Fed--claimed that the government "did not have the ability to selectively impose losses on the counterparties."

Later, Rep. Maxine Waters (D-CA), who has faced her own questions about bailout favoritism, asked Geithner about the Goldman Sachs connections. She pointed out (as we did) that former Treasury Secretary Henry Paulson and current Treasury Chief of Staff Mark Patterson are both Goldman alumni. This issue might come into play again, as Geithner didn't rule out the possibility that Goldman could be one of five firms hired to manage Treasury's public-private partnership program.

On a related note, Rep. Brad Miller (D-NC) asked whether it was appropriate to place former Goldman director Edward Liddy at the head of AIG:

"I don't suspect for a second that he has personally profited in any way by any decision that he has made....But he was also, at the time he accepted the position, on the board of Goldman Sachs, had been for more than five years, had been chairman of the Audit Committee, presumably was involved in decisions about valuing the counterparty positions on credit-default swap contracts with AIG-FP. Was there any discussion about whether appointing Mr. Liddy created issues of appearances and about whether he really brought in the detachment and the fresh eyes that was needed?"

Although Geithner maintained that Liddy is "exceptionally qualified" and has only been "serving the interest of the American taxpayer and helping that company dig out of this mess," Miller correctly pointed out that even the appearance of impropriety can be plenty harmful.

The media has also continued to report on the exceptional aid Goldman Sachs has received, both through the AIG bailout and other forms of taxpayer assistance. This task became a lot easier last week when AIG finally agreed to release more information on its counterparties. Bloomberg News reported this morning that Treasury, through its rescue of AIG, preserved a payday for the top five counterparties (including Goldman) that was worth almost 200 times the bonuses paid to AIG executives. And while Goldman officials still maintain that they hedged their exposure to AIG, TPMMuckraker and others have calculated that Goldman received some $13 billion through the AIG bailout. And that's not counting the additional $10 billion Goldman received through Treasury's Troubled Asset Relief Program (TARP), although company officials say they're hoping to pay back the TARP money within the next month.

In the meantime, Rep. Elijah Cummings (D-MD) has asked Neil Barofsky, the Special IG for the TARP, to conduct a full investigation into the counterparty payments. Even with his limited staff and resources, we hope that Barofsky can fill in the missing pieces of the puzzle, including a complete description of the role Goldman played in the AIG bailout.

-- Michael Smallberg

Comments

[Frank Hope]

Great post. I'm truly excited about the excellent job that Rep. Maxine Waters did in confronting Sec-Treas Geithner on the issue of conflicts of interest with regards to Goldman Sachs and the bailout.

And I'm equally thrilled that Rep. Elijah Cummings is pursuing using the TARP Special Investigator General to investigate the money that was secretly transfered to AIG counterparties including Goldman Sachs. That after all is the SIG's job. It's embarrassing to have the NY state attorney general be more actively pursuing abuses of the TARP program than the SIG.

I have posted a few stories on my blog regarding these developments. There is one on Rep. Maxine Waters here. And one on Rep. Elijah Cummings here. I also wrote an article about the TARP SIG here.

I just want to give a big shout out to the great job POGO is doing on this issue. I have no doubt that the congressional staff of these two very dedicated and patriotic congresspeople are using POGO as a source of information. Keep up the good work!

[bslocater]

This discussion is a complete waste of time -
a) AIG cannot "selectively" default against specific counterparties;
b) If I understand what GS did behind these trades, if AIG were to default or restructured against all counterparties equally, GS will fare better than others.