Geithner Must Go

[one...two...tree 2,762]

By William Greider, The Nation

The first casualty of the president's political debacle will likely be Timothy Geithner, the severely over-confident treasury secretary well known as a lapdog of Wall Street. Geithner was effectively repudiated by the president last week when Barack Obama abruptly announced a new, more aggressive approach to financial reform. But the immediate threat to Geithner is the scandal of collusion and possibly illegal behavior gathering around the Federal Reserve Bank of New York for its megabillion-dollar takeover of insurance giant AIG.

Tim Geithner is standing in the middle of the muck because he was still president of the New York Fed in the fall of 2008 when it rescued AIG with tons of public money (now totaling $180 billion). The facts of the deal are catching up with him now and none are good, since they raise doubts about his competence and his public integrity. This scandal has smoldered for several weeks in newspaper business sections, but is about to grab front-page attention. The House Oversight Committee, chaired by Edolphus Towns, has turned up damning evidence and called Geithner to testify the week of January 27. Committee investigators are poring through some 250,000 e-mails and subpoenaed documents and finding smoking revelations. House Republicans smell blood. House Democrats, given the present climate of popular discontent, are unlikely to rally around tainted goods.

Perhaps the most explosive revelation is that Geithner's subordinates at the New York Fed instructed AIG executives to evade securities law and conceal from the public the $62 billion the insurance company paid out on contracts with the largest investment houses and banks. AIG was already bankrupt and 80 percent owned by the government, kept afloat solely with the billions being injected by the central bank. Yet the Fed told the company to pay off the bankers at full value--100 percent on the dollar--without negotiating a better deal for the public. The bankers would not have collected a dime if the government hadn't come to the rescue.

The Fed, other words, gave the largest, most prestigious banks a very sweet deal--much sweeter than anything the banks or the federal government will offer to homeowners facing mortgage foreclosure. The central bank, in effect, was operating a backdoor bank bailout that nobody could see. The public billions devoted to AIG went in one door at the insurance company and came out another door to the private banks. Goldman Sachs alone collected $13 billion.

Failure to disclose is a big no-no in corporate finance. People can go to jail if they willfully withhold material information from shareholders and the Securities and Exchange Commission (SEC), or they may be sued for investor fraud. Yet that is what the New York Fed told AIG to do. The company officers wanted to report fully to the SEC. Their Fed overseers told them to take out the disclosure out of their report to the SEC (the facts were ultimately not disclosed until five months later). The Fed, remember, is the government's principal banking regulator. It is supposed to enforce the laws, not tell regulated firms to break them.

What was the Fed anxious to hide? Clearly, it was the clandestine and illegitimate conduit it had devised at AIG to funnel billions to the banks, unseen by the public. Keeping this bailout secret would avoid arousing even greater anger about the bailouts. It might also help prop up stock prices at endangered banks, though savvy financial players swiftly figured out what was going on. Only the people needed to be kept in the dark, along with their elected representatives in Congress.

The Federal Reserve was trying to cover its own butt. And Timothy Geithner's. Geithner was at the center of arranging the backdoor handouts on the New York end. Disclosing precisely what he had done would have definitely damaged his chance of becoming Obama's treasury secretary. Members of Congress repeatedly demanded to know which firms got the Fed's money. The Federal Reserve chairman and his top deputies said it would be "inappropriate" to say.

Somebody seems to be lying in this matter. When the Fed's irregular action to block AIG's full disclosure was first reported, Treasury officials said Geithner was not involved because he had "recused" himself from the AIG dealings. Yet, according to the latest revelations reported by the New York Times, the general counsel of the New York Fed, Thomas Baxter, has told House investigators that Geithner verbally approved AIG's generous payouts to the banks.

So which is it? Was Geithner involved or wasn't he? It seems highly improbable Geithner could have managed to remain ignorant of this very controversial transaction. In fact, it would have been derelict for him not to have known about it. Committee members will want to probe the question further--what did Tim Geithner know and when did he know it? Let's hope he is under oath. Martha Stewart, remember, went to prison not for trading stocks on insider information but because she lied to federal investigators.

The treasury secretary's precarious situation may well spill over to damage the fate of Federal Reserve chairman Ben Bernanke, seeking Senate confirmation for a second term. Until now, the Board of Governors in Washington has claimed to be aloof from the AIG mess at the New York Fed. This may also be untrue, according to the latest revelations. Some of the Fed governors in Washington, it turns out, were quite upset by the deals being made by Geithner's staff at the New York Fed. Lying is easier when a government agency is given privileged secrecy.

"What does any of this buy us?" some governors asked, according to one newly disclosed e-mail message. Good question. For that matter, what did the public get for its $180 billion? Senators might want an answer before they vote to give Bernanke another four years. Bernanke's distress was revealed last week when he suddenly announced that he wants a GAO audit of the entire AIG deal-making. That was jarring because Bernanke has repeatedly claimed the Congressional demands for a GAO audit of the Federal Reserve would destroy this sanctified institution.

The smell of scandal poses a more fundamental question about the future of the Federal Reserve. The president's financial reform proposals would authorize the Federal Reserve to become the super-regulator of the entire financial system--empowered in privileged secrecy to decide the most fateful matters of who should fail, who should be saved. The largest banking institutions are comfortable with this "reform," since they proposed the idea. Anyone else who looks closely at the Fed and the AIG fiasco should see immediately the alarming implications.

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National affairs correspondent William Greider has been a political journalist for more than thirty-five years. A former Rolling Stone and Washington Post editor, he is the author of the national bestsellers One World, Ready or Not, Secrets of the Temple, Who Will Tell The People, The Soul of Capitalism (Simon & Schuster) and, most recently, Come Home, America.

[Danno 1,228]

Wait, isn't this the guy we were told we "Had to have"?

[scandal 951]

I like Geithner.

I also like Bernanke. I hope he gets his Senate confirmation over with quickly.

I would like to see both stay on in their current positions.

Napolitano - not so much. She could go in the first cabinet shuffle, as far as I'm concerned.

[DEDixon 39]

i just hope obama keeps his effing mouth shut so the stock market doesn't take another hit....please obama, please shut the f up?

[Hilarious Clinton 452]

[Ban Hammer 13,399]

[Joseph & Ana 0]

The socialists always love tax cheats. Hence the numerous ones in Obama's administration

[one...two...tree 2,762]

touche...what a blunder.

[one...two...tree 2,762]

The socialists always love tax cheats. Hence the numerous ones in Obama's administration

“The most brilliant propagandist technique will yield no success unless one fundamental principle is borne in mind constantly - it must confine itself to a few points and repeat them over and over” ~ Joseph Goebbels

[Joseph & Ana 0]

You can call me a Nazi all day long but it doesn't change the fact that what I said is 100% true.

[Ban Hammer 13,399]

“The most brilliant propagandist technique will yield no success unless one fundamental principle is borne in mind constantly - it must confine itself to a few points and repeat them over and over” ~ Joseph Goebbels

goebbels believed in global warming?

[Danno 1,228]

“The most brilliant propagandist technique will yield no success unless one fundamental principle is borne in mind constantly - it must confine itself to a few points and repeat them over and over” ~ Joseph Goebbels

Sounds like "Hope and Change" to me.

[Joseph & Ana 0]

It was the National Socialist Party after all.

[Ali G. 37]

The socialists always love tax cheats. Hence the numerous ones in Obama's administration

Yeah because naturally Republicans love paying tax that benefits their country and pays for the military they toss over daily..

Edited January 26, 2010 by Booyah

[Joseph & Ana 0]

Yeah because naturally Republicans love paying tax that benefits their country and pays for the military they toss over daily..

And that has to do with what?