Bloomberg: Geithner’s Fed Told AIG to Limit Swaps Disclosure

In a sane world Tim Geithner’s tax troubles would have kept him from being confirmed as Treasury Secretary. Unfortunately, we don’t live sane and those tax troubles pale in comparison to what we’re learning about the Geithner led Federal Reserve Bank of New York’s role in the AIG bailout:

The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.

AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008. The e-mails were obtained by Representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee.

The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps, which were contracts tied to subprime home loans, threatened to swamp the insurer weeks after its taxpayer-funded rescue. The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the swaps, prompting lawmakers to call the AIG rescue a “backdoor bailout” of financial firms.

“It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information,” said Issa, a California Republican. Taxpayers “deserve full and complete disclosure under our nation’s securities laws, not the withholding of politically inconvenient information.” President Barack Obama selected Geithner as Treasury secretary, a post he took last year.

One would think, given these revelations, that Secretary Geithner would be cleaning out his desk now, but this administration’s commitment to transparency, and honest government I wouldn’t hold my breath…As Jim Geraghty notes:

AIG’s liquidity crisis hits in September 2008. The Federal Reserve comes in to rescue them with a credit line of $85 billion, and the big, powerful banks received full cash for their credit-default swaps. But because that aspect of the rescue would be a giant p.r. headache, suggesting that the taxpayer was stepping in to make sure Goldman Sachs and the others didn’t lose anything in their deal, Geithner and his team chose to simply not disclose it to the public.

Bottom line Congressional Democrats and the media have invested a fair amount of time in demonizing AIG and its management and criticizing their bonuses. What we’re slowly learning though is that the problem wasn’t AIG, it was the sneaky and underhanded way that  Geithner and the Federal Reserve Bank of New York decided to cover their tracks by using AIG as a money-laundering device to bailout politically-connected private institutions.

WSJ: Geithner Under Fire Amid Frustration on Economy

Normally I’d say the calls for Treasury Secretary Tim Geithner’s resignation were just hot air but given the recent disclosures about his role in AIG bailout while President of the New York Federal Reserve Bank, I suspect this is more than just normal political blustering:

Snowballing frustration about the economy burst into a political fracas Thursday, with several lawmakers calling on Treasury Secretary Timothy Geithner to resign over angst about unemployment and Wall Street bailouts.

The criticism came largely from House Republicans, who have long been critics of the Treasury secretary. Mr. Geithner’s job status doesn’t appear to be in serious jeopardy and several Democrats at a congressional hearing leapt to his defense.

But joining the anti-Geithner chorus in increasing numbers are more liberal Democrats who say the White House’s economic policies haven’t done enough to boost job growth. The degree of venom aimed at Mr. Geithner is also unusual, as was his willingness to fire back.

During a Joint Economic Committee hearing on Capitol Hill, Rep. Kevin Brady (R., Texas) told Mr. Geithner “the public has lost all confidence in your ability to do the job.”

Mr. Geithner traded barbs with the Republicans, occasionally raising his voice to the point of shouting. “What I can’t take responsibility is for the legacy of crises you’ve bequeathed this country,” he told Mr. Brady.

Rep. Peter DeFazio (D., Ore.) a vocal liberal who called on Mr. Geithner to resign this week, said in an interview that the Treasury secretary’s policies are too closely geared to Wall Street. “Quite frankly, all the gambling on Wall Street is doing nothing to put people back to work in America and rebuild our economy,” he said.

I’m not sure the President can save Sec. Geithner this time, frankly given his tax troubles he never should have never been confirmed as Treasury Secretary in the first place,  but that’s an aside. What’s happening here is the effects of 10.2 percent unemployment and the election results in New Jersey and Virginia are starting to take hold.

Democrat’s on Capitol Hill are starting to worry about the 2010 mid-terms and are trying distance themselves from the White House’s economic policies. Second Republican’s are no longer scared of the White House… At least not so far as the economy is concerned. If they were they wouldn’t be calling for Sec. Geithner’s resignation, particularly to his face.

You can read the full the Special Inspector General’s report on on the AIG bailout Special Inspector General here (PDF).

Related

• Geithner under fire over AIG payments – Financial Times
• Pressure mounts for Geithner to resign – Washington Times
• Liberal Democrat Calls For Geithner’s Resignation – The Public Record

Holy Crap: $12.8 Trillion Spent, Lent or Committed???

From Bloomberg News:

March 31 (Bloomberg) — The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.

New pledges from the Fed, the Treasury Department and the Federal Deposit Insurance Corp. include $1 trillion for the Public-Private Investment Program, designed to help investors buy distressed loans and other assets from U.S. banks. The money works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008.

I don’t know what’s more frightening, that our government and the Federal Reserve have spent, lent or committed $12.8 trillion or that they want to spend more?

Not Just No, But Hell No: GM, Chrysler Seek $21.6 Billion in Aid

General Motors and Chrysler have submitted their recovery plans submitted to the U.S. Treasury and are asking for another $21.6 billion in government aid.

Not just no, but hell no… No amount of government aid is going to bring them back to profitability so long as the government forces them to build car consumers don’t want.

Henry Payne writing at National Review online suggests that:

If Washington and Detroit were really interested in returning GM and Chrysler to profitability, a restructuring might look like this:

1. Congress would eliminate fuel-mileage regulations (so-called CAFE laws) costing an estimated $85 billion over the next decade. These arbitrary standards force automakers to make vehicles customers don’t want, impose nonsensical regulations on how many cars a manufacturer can import from outside the Americas — and what’s more, is encouraging GM to spend $200-a-vehicle to make its fleet ethanol-capable (which a CAFE loophole rewards).
   
2. Concentrate on core products like sedans and light trucks instead of pouring millions into electric cars and other “alternate” fuel vehicles. Companies like Hyundai and Kia produce not a single hybrid yet are gaining U.S. market share by making cheap, profitable automobiles that customers want.
   
3. Reduce manufacturing wages and benefits to industry-leading rates, immediately saving billions and setting a baseline on which to build worker incentives as the companies become profitable again. Not “competitive” rates of $29 an hour versus $26 an hour at U.S. Toyota plants. Not “competitive” beginning wages of $25 an hour, but a beginning wage of $15 an hour (the average U.S. manufacturing wage) with a raise to $21 an hour over two years — which is what Hyundai pays its American workers in its new Alabama plant.
   
4. Slash dealership overhead. At 20 percent, GM and Toyota have roughly the same market share. Yet GM is burdened with a staggering 7,000 dealerships versus Toyota’s 1,500. Fewer and larger dealers would be better able to market, stock, and service the cars they sell and it would also make it easier for GM to slash its eight brands (Toyota has only three). Read the rest…
   

Payne pretty much nails repealing CAFE rules and letting Detroit build cars consumers want will go along toward returning GM and Chrysler to profitability. Lets not forget even when gas prices were pushing $4.00 a gallon half the vehicles sold in the U.S. were light trucks. In November even as the economy was crashing and high gas prices still fresh in people minds the two top selling vehicles were pickups from Ford and Chevy… The Dodge Ram was No. 7.

GM: Billions More In Bailouts or Bankruptcy

Today’s Wall Street Journal has a front page story about GM’s restructuring plans… The article is worth reading unfortunately, the on-line version is subscriber content so if you’re not a Journal online subscriber you’ll have to register to read it.

Here’s the free excerpt:

General Motors Corp., nearing a federally imposed deadline to present a restructuring plan, will offer the government two costly alternatives: commit billions more in bailout money to fund the company’s operations, or provide financial backing as part of a bankruptcy filing, said people familiar with GM’s thinking.

The competing choices, which highlight GM’s rapidly deteriorating operations, present a dilemma for Congress and the Obama administration. If they refuse to provide additional aid to GM on top of the $13.4 billion already committed they risk seeing an industrial icon fall into bankruptcy.

Here we go again, anyone want to guess which option congress will choose?

Son of a Bailout – Bush Gives Auto Makers $17.4 Billion

President Bush this morning morning announced a $17.4 billion bailout plan for auto makers. Under the terms of the plan GM and Chrysler would receive $13.4 billion in loans in December and January, with another $4 billion likely available in February.

The deal is contingent on the companies’ showing that they’re financially viable by March 31, 2009, if they can’t the loan will be called and all funds returned to the Treasury.

Autos Bailout Fact Sheet

The following is a release from the Bush administration detailing its bailout for the car industry:

Fact Sheet: Financing Assistance to Facilitate the Restructuring of Automobile Manufacturers to Attain Financial Viability

Purpose: The terms and conditions of the financing provided by the Treasury Department will facilitate restructuring of our domestic auto industry, prevent disorderly bankruptcies during a time of economic difficulty, and protect the taxpayer by ensuring that only financially viable firms receive financing.

Amount: Auto manufacturers will be provided with $13.4 B in short-term financing from the TARP, with an additional $4 B available in February, contingent upon drawing down the second tranche of TARP funds.

Viability Requirement: The firms must use these funds to become financially viable. Taxpayers will not be asked to provide financing for firms that do not become viable. If the firms have not attained viability by March 31, 2009, the loan will be called and all funds returned to the Treasury.

Definition of Viability: A firm will only be deemed viable if it has a positive net present value, taking into account all current and future costs, and can fully repay the government loan.

Binding Terms and Conditions: The binding terms and conditions established by the Treasury will mirror those that were voted favorably by a majority of both Houses of Congress, including:

• Firms must provide warrants for non-voting stock.
• Firms must accept limits on executive compensation and eliminate perks such as corporate jets.
• Debt owed to the government would be senior to other debts, to the extent permitted by law.
• Firms must allow the government to examine their books and records.
• Firms must report and the government has the power to block any large transactions (> $100 M).
• Firms must comply with applicable Federal fuel efficiency and emissions requirements.
• Firms must not issue new dividends while they owe government debt.

Targets: The terms and conditions established by Treasury will include additional targets that were the subject of Congressional negotiations but did not come to a vote, including:

• Reduce debts by 2/3 via a debt for equity exchange.
• Make one-half of VEBA payments in the form of stock.
• Eliminate the jobs bank.
• Work rules that are competitive with transplant auto manufacturers by 12/31/09.
• Wages that are competitive with those of transplant auto manufacturers by 12/31/09.

These terms and conditions would be non-binding in the sense that negotiations can deviate from the quantitative targets above, providing that the firm reports the reasons for these deviations and makes the business case to achieve long-term viability in spite of the deviations.

In addition, the firm will be required to conclude new agreements with its other major stakeholders, including dealers and suppliers, by March 31, 2009.

Putting aside the obvious question of why are the taxpayers being asked to throw good money after  bad yet again… Key provisions of this deal, wage concessions, changes in work rules and the elimination of the jobs bank are non-binding. Second there’s nothing in this deal about the legacy costs and/or the government regulations that are choking these companies.

This is nothing more than an expensive joke on us the tax payers.

Call Your Senator…

The House of Representatives passed the auto industry bailout bill 237-170 last night. The Senate will be taking up the bill in the next couple of days.

Call your Senator @ 202-224-3121 and urge him to vote no.

Ask your friends and family to do the same.

Mitch McConnell: No

Senate Minority Leader Mitch McConnell has broken with the White House and come out against the auto industry bailout in a Senate floor speech:

“These are turbulent times for the U.S. economy. Over the past several months, Americans have seen giant companies fail, significant job losses, and, after unprecedented problems in the credit markets, the frightening prospect of total disarray within our nation’s Main Street economy.

“The crisis in the credit markets came at us quickly. We were told that urgent government action was needed in order to shore up the broader economy — and that failure to act would lead to a complete collapse of consumer credit, the very lifeblood of our nation’s economy.

“Under ordinary circumstances, I would have opposed such a measure. Government intervention in the marketplace cuts against all my ordinary impulses. But this was not an ordinary event. I, and many others, believed that extraordinary action was needed to protect millions of ordinary Americans from the colossal and far-reaching mistakes of a few. And action was taken.

“The systemic breakdown that some envisioned has not occurred, so there is reason to believe that the medicine has had some effect. But, on the whole, the overall economy continues to struggle. Some industries have been hit harder than others. And one of them is the auto industry.

“The problems in the auto industry have been long in the making. But last month the situation grew so dire that American automakers came to Washington with an urgent appeal for federal help. Over the past few weeks, lawmakers have taken the time to examine the problems at these companies and the solutions that they have proposed. And now the American taxpayers are being asked to put their money behind a plan that is aimed at helping these companies survive.

“Republicans received that plan late yesterday morning. We reviewed it closely to see if it meets the criteria that I have laid out repeatedly for taxpayer-protections and an effective strategy for securing the long-term viability of these companies. In the end, I concluded that it does not.

“In some ways, the proposal that was worked out by the White House and Congressional Democrats appears tough. It calls on struggling auto companies and autoworkers to make the sort of sacrifices they have not been accustomed to making in the past. It also includes time limits as a way of hastening necessary reforms. But in reality, this proposal isn’t nearly tough enough.

“A primary weakness relates to the so-called ‘Car Czar,’ who has nearly unlimited power to allocate taxpayer dollars but limited ability to force the kinds of tough concessions that long-term viability would require.

“Another problem lies outside the proposal itself. And here I’m referring to the type of government action that’s being contemplated. Somewhat lost in the recent debate over the auto industry is the fundamental difference between it and the financial rescue plan that Congress approved in October. While that plan was intended to rescue the entire economy, this one is intended to save a single industry. That plan was intended to help everyone — from small business owners to college students; and every lawmaker who voted for it acted on the belief that that is what it would do.

“A failure to appreciate this distinction has caused a number of other industries and even a number of municipalities across the country to prepare their own proposals for a government rescue as all Americans weather the tough economy. It has also created the impression in some minds that the federal government is picking favorites, and that favored businesses get help while others don’t.

“A lot of struggling Americans are asking where their bailout is. They wonder why one business would get support over another. When it comes to the auto industry, many Republicans in Congress have asked these same questions.
“There are many principled reasons to oppose this bill. But the simplest one is also the best: ‘a government big enough to give us everything we want is a government big enough to take everything we have.’ This is as true for individuals as it is for business. It’s the primary principle on which American industry, including the auto industry, was built. And even in turbulent moments like this — perhaps especially at moments like this — it’s a principle well worth defending.

“Some argue that the effects of an auto industry collapse would be too acute and far-reaching for an already-struggling economy to bear. This is impossible to know. And even if we grant that these companies would fail without taxpayer help, we would still have to ask ourselves whether the proposal before us achieves the goal that everyone claims to embrace — namely, the long-term viability of ailing car companies — and, in my view, it does not.

“I have already enumerated some of the weaknesses in the plan. But in the end, its greatest single flaw is that it promises taxpayer money today for reforms that may or may not come tomorrow. And we would not be serving the American taxpayer well if we spent their hard-earned money without knowing with certainty that their investment would result in stronger, leaner auto companies that would not need additional taxpayer help just a few months or weeks down the road.

“We simply cannot ask the American taxpayer to subsidize failure.

“All Americans, including myself, are worried about the future of our nation’s automakers. These companies have a venerable place in the story of modern America. They continue to provide hundreds of thousands of jobs across the country, including nearly 50,000 auto-related jobs in my own home state of Kentucky.

“But many Americans are also worried about the prospect of the government intervening on behalf of some industries and not intervening on behalf of others — especially when there is no guarantee it that the interventions will work. They wonder when the spending stops. If I were to vote in favor of this bill, I would not have a good answer for them.

“The best route for the long-term viability of ailing car companies may be a rocky one. Government help is not the only option. It’s not even the best option. Long-term viability is still possible. But it’s only possible if these companies are forced to make the tough choices necessary for their survival.

“Senator Corker has proposed an amendment that would go a long way toward improving this bill. In keeping with the principles I’ve outlined, the Corker Amendment does not just encourage reform, it requires it. And it does so with crucial specificity. First, participating companies would be required to reduce their outstanding debt by at least two-thirds through an equity swap with bondholders.

“The Corker Amendment also requires that labor costs at participating companies be brought on par with companies like Nissan, Toyota, and Honda — not tomorrow but immediately — because it is delusional to think that a company which spends $71 per labor hour could compete with a company in the same industry that spends $49.
“The Corker Amendment would improve the liquidity and cash-flow of automakers by requiring that a portion of the payments made to union accounts consist of company stock.

“And finally, the Corker Amendment would require participating companies to file for Chapter 11 reorganization if any of these conditions aren’t met by a fixed date.

“The Corker Amendment forces necessary reforms, holds companies accountable, and assures taxpayers that these companies won’t be back for more. If legislative action were necessary, the Corker proposal would make many much needed and dramatic improvements to the underlying bill.

“I, like all of my colleagues, want the U.S. auto industry not only to survive but to thrive. And by cutting costs, streamlining production, increasing fuel efficiency, and investing in new technologies and attractive, more competitive designs, American auto companies will once again make cars that people all over the world will want to buy. Then Americans will be able to say again with pride that our cars are the best.

“In addition protecting the taxpayer, this is a goal that Republicans have been fighting hard for in this debate. And in my view, it’s a goal that is well worth our efforts.”

H/T: Kathryn Jean Lopez

Update: Here’s the text of the Corker Amendment Sen. McConnell mentions.

H/T: Michelle Malkin

Will The Auto Industry Bailout Work?

I’ve been so focused on finishing up the projects I’m working before the holidays I’ve only been half attention to the new recently. I completely missed Holman W. Jenkins Jr. latest Wall Street Journal column:

The Bailout That Won’t

Would you buy a car from Congress?

By Holman W. Jenkins Jr., Wall Street Journal, December 10, 2008

Leave it to Bob Lutz, GM’s voluble vice chairman, to puncture the unreality of the auto bailout he himself has been championing. In an email to Ward’s Auto World, he notes an obvious flaw in Congress’s rescue plan now taking shape: The fuel-efficient “green” cars GM, Ford and Chrysler profess to be thrilled to be developing at Congress’s behest will be unsellable unless gas prices are much higher than today’s.

“Very few people will want to change what has been their ‘nationality-given’ right to drive big and bigger if the price of gas is $1.50 or $2.00 or even $2.50,” Mr. Lutz explained. “Those prices will put the CAFE-mandated manufacturers at war with their customers — and no one will win in that battle.”

Translation: To become “viable,” as Congress chooses crazily to understand the term, the Big Three are setting out to squander billions on products that will have to be dumped on consumers at a loss.

None of this was mentioned at four days of congressional bailout hearings, because Detroit knows better than to suggest Congress has a role in the industry’s problem. Yet its own recently updated Corporate Average Fuel Economy regime, or CAFE, makes a mockery of the idea that government money will render the companies profitable, even as the same bailout bill demands that the Big Three drop their legal challenge to a California mileage mandate even more unsustainable than the federal government’s.

Forget Chrysler, which has needed a bailout from Washington or Stuttgart in three of the last four recessions. The tragedy of GM and Ford is that, inside each, are perfectly viable businesses, albeit that have been slowly murdered over 30 years by CAFE. Both have decent global operations. At home, both have successful, profitable businesses selling pickups, SUVs and other larger vehicles to willing consumers, despite having to pay high UAW wages. Read the rest…

The problems at the Big 3 have been a long time in the making. Unfortunately, the bailout plan being pushed by the White House, Congress and the Big 3 ignores reality… As long as gas prices are reasonably low people are going to buy big cars.

The last time I went car shopping the price of gas or fuel economy were way down on the list of things I was thinking about… The number one thing was can this car get me, 3 friends and 4 golf bags the to course in relative comfort, number two was price. Bottom line I’m not going to buy a car that doesn’t meet my needs.

My Give a Damn’s Busted

I haven’t been blogging much recently I’ve tied up a couple of projects that have to be finished before the end of the year, and frankly I’m so disgusted, disappointed and disillusioned with the behavior of our elected leaders my give a damn’s busted.

It doesn’t matter what we think, they’re just going to keep printing money, running up the debt and pushing bailout after bailout and stimulus package after stimulus package… none which are going to help get us out our current economic mess.

Any way here’s a few must reads:

First up is Harvey Golub’s Wall Street Journal Op Ed titled “Getting Out of the Credit Mess”

To begin to understand today’s problem, we have to have a sense of how we got there. Between 1994 and second quarter 2008, the U.S, housing stock more than doubled in value from $7.6 trillion to $19.4 trillion. Almost three quarters of that increase was due to a speculative bubble, the root cause of which was government policies designed to increase home ownership, largely among people who would be considered nonprime borrowers — i.e., people without sufficient documented income or employment history and little or no savings or credit history.

The intellectual start of this mess was in a flawed Boston Federal Reserve study published in 1992 that purported to show that minorities were treated less well than whites. That study led to increased political pressure on banks to modify their standards with increased emphasis through the Community Reinvestment Act, and aided by U.S. Department of Housing and Urban Development regulations in the Clinton administration that required parity of outcomes in the lending process.

The effect of all of this meddling was compounded by the lax or incompetent supervision of Fannie Mae and Freddie Mac. All in all, the government got into the business of encouraging and then forcing lending institutions to make mortgage loans to people who could not pay them back. What we ended up with is a failure of government, which we have erroneously termed a failure of capitalism. Read the rest…

The second is a Newsmax.com piece titled “Four Big Lies about the Big Three Automakers” by Dan Weil

Third is a CNSNews.com piece by Matt Hadro titled “Obama’s ‘New Deal’ Not Likely to Cure Economy or Unemployment Rate, Free Market Economists Say”

It’s time our elected leaders faced reality admitted their own culpability in this mess and realized they can’t simply keep printing money and trying to spend our way out of this economic downturn.

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