The New York Times Turns a Critical Eye on the Politics of Big Finance


In its issue of 30/06, The New York Times offers a stupendous bit of research on the privileged handling of the mega-banks by the supposed defendants of a nation's interest ("Documents on Bailout of AIG Show How Big Banks Benefitted" by Louise Story and Gretchen Morgenson): "At the end of the American International Group's meeting last month, a shareholder approached the microphone with a question for Robert Benmosche, the insurer's chief executive.

"'I'd like to know, what does AIG plan to do with Goldman Sachs?' he asked. 'Are you going to get – recoup – some of our money that was given to them?'

"Mr. Benmosche, steward of an insurer brought to its knees two years ago after making many risky, outsize financial bets and paying billions of dollars in claims to Goldman and other banks, said he would continue evaluating his legal options. But, in reality, AIG has precious few.

"When the government began rescuing it from collapse in the fall of 2008 with what has become a $182 billion lifeline, AIG was required to forfeit its right to sue several banks – including Goldman, Société Génerale, Deutsche Bank and Merrill Lynch – over any irregularities with most of the mortgage securities it insured in the pre-crisis years.

"But after the Securities and Exchange Commission's civil fraud suit filed in April against Goldman for possibly misrepresenting a mortgage deal to investors, AIG executives and shareholders are asking whether AIG may have been misled by Goldman into insuring mortgage deals that the bank and others may have known were flawed.

"This month, an Australian hedge fund sued Goldman on similar grounds. Goldman is contesting the suit and denies any wrongdoing. A spokesman for AIG declined to comment about any plans to sue Goldman, or any other bank with which it worked. A Goldman spokesman said that his firm believed that 'all aspects of our relationship with AIG were appropriate.'"

A Legal Waiver

"Unknown outside of a few Wall Street legal departments, the AIG waiver was released last month by the House Committee on Oversight and Government Reform amid 250,000 pages of largely undisclosed documents. The documents, reviewed by The New York Times, provide the most comprehensive public record of how the Federal Reserve Bank of New York and the Treasury Department orchestrated one of the biggest corporate bailouts in history.

"The documents also indicate that regulators ignored recommendations from their own advisers to force the banks to accept losses on their AIG deals and instead paid the banks in full for their contracts. That decision, say critics of the AIG bailout, has cost taxpayers billions of extra dollars in payments to the banks. It also contrasts with the hard line the White House took in 2008 when it forced Chrysler's lenders to take losses when the government bailed out the auto giant."

The Dubious AIG Bailout

"As a Congressional commission convenes hearings Wednesday exploring the AIG bailout and Goldman's relationship with the insurer, analysts say that the documents suggest that regulators were overly punitive towards AIG and overly forgiving of banks during the bailout – signified, they say, by the fact that the legal waiver undermined AIG and its shareholders' ability to recover damages.

"'Even if turns out that it would be a hard suit to win, just the gesture of requiring AIG to scrap its ability to sue is outrageous,' said David Skeel, a law professor at the University of Pennsylvania. 'The defense may be that the banking system was in trouble, and we couldn't afford to destabilize it anymore, but that just strikes me as really going overboard.'

"'This really suggests they had myopia and were looking at it entirely through the perspective of the banks,' Mr. Skeel said.

"Regulators at the New York Fed declined to comment on the legal waiver but disagreed with that viewpoint.

"'This was not about the banks,' said Sarah J. Dahlgren, a senior vice president for the New York Fed who oversees AIG. 'This was about stabilizing the system by preventing the disorderly collapse of AIG and the potentially devastating consequences of that event for the US and global economies.'

"This month, the Congressional Oversight Panel, a body charged with reviewing the state of financial markets and the regulators that monitor them, published a 337-page report on the AIG bailout. It concluded that the Federal Reserve Bank of New York did not give enough consideration to alternatives before sinking more and more taxpayer money into AIG. 'It is hard to escape the conclusion that FRBNY was just going through the motions,' the report said.

"About the $46 billion of the taxpayer money in the AIG bailout was used to pay to mortgage trading partners like Goldman and Société Génerale, a French bank, to make good on their claims. The banks are not expected to return any of that money, leading the Congressional Research Service to say in March that much of the taxpayer money ultimately bailed out the banks, not AIG.
"A Goldman spokesman said that he does agree with that report's assertion, noting that his firm considered itself to be insulated from possible losses on its AIG deals.

"Even with the financial reform legislation that Congress introduced last week, David A. Moss, a Harvard Business School professor, said he was concerned that the government had not developed a blueprint for stabilizing markets when huge companies like AIG run aground and, for that reason, regulators' actions during the financial crisis need continued scrutiny. 'We have to vet these things now because otherwise, if we face a similar crisis again, federal officials are likely to follow precedents set this time around,' he said."


-- from COMER, August 2010