Thursday, June 10, 2010

A boatload of sugar helped the poison go down

AIG’s Government Rescue Had ‘Poisonous’ Effect, U.S. Panel Says
“The government’s actions in rescuing AIG continue to have a poisonous effect on the marketplace,” said the Congressional Oversight Panel panel, led by Harvard University law professor Elizabeth Warren.

“The AIG rescue demonstrated that Treasury and the Federal Reserve would commit taxpayers to pay any price and bear any burden to prevent the collapse of America‘s largest financial institutions and to assure repayment to the creditors doing business with them.”

American International Group Inc.’s bailout had a “poisonous” effect on the U.S. financial system because it demonstrated the government would protect firms from their own risk-taking.

Treasury Secretary Timothy F. Geithner said in January. Geithner, 48, executed the bailout while he led the Federal Reserve Bank of New York in 2008.

AIG leaders allowed the firm to accumulate “staggering amounts of risk” in derivatives and other areas, the panel said.

The breadth of operations weren’t “matched by a coherent regulatory structure to oversee its business.” The Office of Thrift Supervision had oversight of the parent company and failed to limit risks from swaps, the panel said.

Regulators have said that they were forced to save AIG to prevent a wave of failures that a collapse would have sparked.

The report “overlooks the basic fact that the global economy was on the brink of collapse and there were only hours in which to make critical decisions,” Andrew Williams, a Treasury spokesman, said in an e-mailed statement.

“We have learned from that experience and have been fighting for more than a year to give the government authority to put firms, like AIG, out of existence when their failure poses a danger to our economic system.”

If Congress truly has learned anything from the experience, they should be passing rock solid and loop-hole free financial reforms, including the Volker Rule, rather than continue to pander to the banking lobbyists as has been their habit.

Write your Senator, write your Congresswoman, and insist on the Volker Rule. Guambat would, but being a dual Guamanian/Australian doesn't give him any such representation.

Congressional watchdog criticizes rescue of AIG
The firm was nearly wiped out by credit default swaps, which amount to insurance [sic: in reality, bets] against the risk that mortgages and other debts will go bad. Treasury and the Fed pulled AIG back from the brink in September 2008.

When the housing market collapsed, AIG couldn't meet its obligations to its counterparties, including Goldman Sachs and JPMorgan Chase. In the bailout, the Fed paid the counterparties 100 cents on the dollar.

The government relied only on Goldman Sachs and JPMorgan to arrange a private rescue of AIG, a conflict of interest because, as AIG counterparties, "They would have been among the largest beneficiaries of a taxpayer rescue."

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