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The Public Policy
A Tale of Two Treasuries
Hamilton versus Paulson/Geithner on the AIG bailout.
In his debut as the nation’s 75th treasury secretary, Timothy Geithner has been a smashing success — if success is measured by more federal debt and less accountability to American taxpayers. It was never supposed to be this way.
When our first treasury secretary, Alexander Hamilton, sought to establish the nation’s first bank in 1791, he faced challenges from those who condemned the move as an unconstitutional power grab to control the flow of credit and direct the national economy. Against these criticisms, Hamilton drafted numerous provisions to ensure solvency, transparency and fiscal restraint on the part of the federal government. ”No government,” Hamilton argued, “has a right to do merely what it pleases.”
But when it comes to the government’s managing of the AIG bailout, that’s exactly what is happening. An unprecedented power-grab by the Paulson/Geithner Treasury has spent an unparalleled amount of money to purchase a failing financial giant with no accountability, no return on the investment and no end in sight.
A bit of history. Before Timothy Geithner assumed his cabinet post at Treasury this year, he served as the president of the Federal Reserve Bank of New York, where he was the chief negotiator for many of the government’s bailout proposals last year. One such bailout involved AIG, a whale of a multi-national corporation beached sideways on a mound of credit default swaps and other high-risk financial products.
In September 2008, Geithner engineered the government’s purchase of an 80% share in AIG for the handsome sum of $85 billion, the amount necessary to prevent the company from entering bankruptcy. Losses continued to mount, however, and more federal dollars were needed.
Total cost of AIG’s bailout to date? A staggering $185 billion — or roughly $1400 per U.S. taxpayer. Yet today, according to AIG’s own numbers, the company is worth less than $6 billion, and this after posting the largest quarterly loss in corporate history. Nevertheless, the problems at AIG extend beyond the balance sheets.
In March of this year, we learned what the Obama administration already knew — that after receiving bailout funds, AIG paid $165 million in executive bonuses to employees of its troubled financial products division. Additionally, more than $30 billion in counterparty payments were made to Goldman Sachs, Bank of America, Citigroup, J.P. Morgan and Wachovia — all of which received separate bailout funds directly from the government — and foreign banks like Deutsche Bank, Société Générale and UBS, who received counterparty payments in excess of $50 billion.
The public was beyond outrage. They were sold something they didn’t want for more than it was worth in a midnight fire sale of busted corporations over-leveraged in troubled, toxic assets. And yet, taxpayers are still kept in the dark about the management of their controlling interest in AIG.
In a legal sleight of hand, the New York Federal Reserve — under Geithner’s supervision and in corroboration with then-Secretary Hank Paulson — established the AIG trust, an ill-conceived and likely unconstitutional arrangement. According to Geithner’s scheme, three handpicked government trustees represent taxpayer interests with indemnity from lawsuits and exemptions that allow them to take advantage of business opportunities for personal profit that would otherwise benefit AIG.
A sweetheart deal to be sure. And while it’s easy to see how the trust was structured to protect the trustees — and perhaps the Treasury, in whose interests they are legally compelled to act — there is almost no protection for the taxpayers who fronted the cash that’s keeping AIG afloat.
In fact, provisions of the AIG trust threaten U.S. taxpayers. By tying the trustees’ fiduciary duty to the Treasury — now run by Secretary Geithner — the risk that short-term political interests will trump long-term financial soundness is intensified.
Moreover, where ordinary trustees are generally prohibited from exploiting investment opportunities that they learn about as a direct result of their responsibilities, the AIG trustees are free to secretly invest their own capital without disclosure.
Finally, Secretary Geithner has ensured the broadest possible indemnity protections for AIG trustees. Ostensibly, the trustees could initiate a clandestine investment plan to pad their own portfolios, appoint directors complicit in the fraudulent scheme, run AIG into the ground while making dollar-for-dollar counterparty payments and leave U.S. taxpayers holding a paper company with no market capitalization and drowning in debt — all without any legal recourse.
In the end, the bailout of AIG has made U.S. taxpayers more vulnerable, not less. It has established a dangerous precedent for impulsive federal control of private corporations, siphoned off billions of taxpayer dollars and aggravated our economic pain rather than heal it.
Astoundingly, Secretary Geithner recently announced the possibility of structuring a similar bailout trust for Citigroup. If insanity is doing the same thing over and over and expecting different results, I’m afraid the inmates are running the asylum over at the Department of Treasury.
And somewhere in the Trinity Church Cemetery in downtown Manhattan, Alexander Hamilton must be spinning.
Letter to the Editor View all comments (35) | Leave a comment
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Rocco| 6.8.09 @ 6:49AM
Well, congressman, what are you and your colleagues doing about these abuses? Talk is cheap.
Pingback| 6.8.09 @ 7:10AM
Multinational Corporations » Blog Archive » A Tale of Two Treasuries - Spectator.org links to this page. Here’s an excerpt:
Ryan| 6.8.09 @ 8:37AM
Are there any pending Supreme Court issues that could come up fast enough to do anything? the only one that I can think of is the upcoming Chrysler case, which may be too little, too late, and not enough support by the people who SHOULD be fighting it (unless they're helping to fund the the suit through the back door).
Bill Coulter| 6.8.09 @ 8:48AM
Doesn't AIG insure the pension plans of Congress?
loulou| 6.8.09 @ 10:32AM
Rocco: Issa's not going to do anything--he's part of the problem.
Steve| 6.8.09 @ 10:36AM
I'm with Rocco, congressman. Let's do something to demonstrate to the nation that the GOP still has a pair. It is dangerously close to midnight and this nonsense has got to stop.
Donaldo| 6.8.09 @ 12:28PM
Well, if not a single congressperson read the "stimulus" legislation before voting for it, what can we expect? The title "Representative" has lost its meaning when Pelosi, Franks et al are re-elected every few years.
Rocco| 6.8.09 @ 1:00PM
loulou:
You're right, and I know that all too well. The question was merely rhetorical.
JG| 6.8.09 @ 2:10PM
What do Rep.'s from California know about fisical resposibility?
Tejas Forever| 6.8.09 @ 2:36PM
Give me a break Congressman... Instead of doing something about it you are whining on here? The Repubs are swiftly losing ALL credibility. Why can you speak out about this in public? Because you are part of the problem, that's why...
Osprey1| 6.8.09 @ 2:45PM
The concept of Congressional oversight on the bailout/ T.A.R.P and the like sounds lovely, but it’s a pipe dream, the Congress and apparently each of the Cabinet Positions have figured out how to manipulate the system to guarantee their ability to do whatever they what, steal what they like and do so with impunity. Just yell loudly “Its Bushes Fault” and the press will back you up and cover your thievery. For all of this abuse I blame the electorate, those Americans foolish enough to throw away their critical thinking skills and depend on the Democrats in the press to tell them what to do and think. Now as those same people and stealing, and destroying the fabric of this once great nation they stand in stunned silence blaming someone who is no longer here. I am not sure our nation can withstand the abuse and destruction of its constitution, bankrupt, leaderless and listing I fear the end of Rome is near.
God Bless America…..we sure do need it as we sit in this hand basket with only 48% of us knowing where we are going and the other 52% thinking that it’s a great way to travel.
Dustoff| 6.8.09 @ 4:14PM
JG| 6.8.09 @ 2:10PM
What do Rep.'s from California know about fisical resposibility?
++++++++++++++++++++++++++++
Ahhhh, Calif has been and still is controled by Dem's .
Rep's have no power.
Conrad Spiracy| 6.8.09 @ 5:01PM
Rep Issa:
Spot on, with one exception. Wachovia received no TARP funds. The TARP program was passed one week after the government engineered takeover of Wachovia by Wells Fargo. Wells then received TARP money after the takeover.
If Wachovia HAD received TARP funds, they might possibly still be existing as an independent corporation today, thus continuing to provide more market pressure, rather than less as the conglomerate that has become the "new" Wells Fargo will be able to.
I know many people who have had their jobs eliminated due to the Wells takeover of Wachovia (legacy Wachovia employees, of course) and they say that there are many more yet to come. Where is the economic benefit here???
Bottom line: get GovCo the he!! out of the marketplace - including all of their silly-a$$ed regulations and "stimuli." If Wachovia was destined to fail, then so be it. GovCo has no place in pronouncing edicts that determine who survives and how.
As previous posters have asked, I will also. What in the world are YOU doing about it?
Lame-a$$ed Republicans. Let's elect some true conservatives to office. Let's draft J.C. Watts for President! He'd run circles around your butt.
Roy| 6.8.09 @ 7:35PM
A trillion here and a trillion there, pretty soon you're talking about fake money.
PK| 6.9.09 @ 8:22AM
Paulson and Geithner are certainly catastrophic failures as Treasury Secretaries but not because they differ from Hamilton. Rather it is because they are exactly like Hamilton! They are all statists who believe it's up to the privileged ruling class to pull the strings of the economy to make the simple folks dance.
J Lee| 6.9.09 @ 10:13AM
Tejas Forever,
You should look at the trends in the polls, and Rasmussen is a good place to start. It appears the Dems are swiftly losing ALL credibility when it comes to the economy (and a few other key measures as well).
Keith| 6.9.09 @ 11:46AM
Amazing. Evidently this author has no clue what Hamiltonaianism is? Folks like to incorrectly accuse Obama and his admin of being socialist and/or marxist. They are actually Hamiltonians.
Chris| 6.9.09 @ 12:34PM
Let me start by saying that I'm a staunch conservative Republican who agrees with Rep. Issa's critique of Mr. Geitner's efforts. However, I'm frustrated that my party has not been able to communicate the principle of trade-offs, and how politicians seeking a "solution" to the current problem are delusional. Obama has created a mass movement by devaluing the past/present and appealing to a group that seeks an imaginary self. Our conservative leaders need to break this fanaticism by communicating the near-term sacrifices that need to be made in order to reap the long-term benefits of a future fueled by American ingenuity and freedom of choice. I will admit this could be challenging for the Baby Boomer generation who have never sacrificed anything but consumed everything, but the time will come when this message strikes a chord.
Jeff| 6.9.09 @ 1:35PM
Thank you for your admonishment of the greed on Wall Street, the incompetence of the legislature, and the abuse of the FRB system.
We need more results-oriented representatives like you. Your bankrupt state and your friends in the Senate show that you are a man of your word.
Yonemoto| 6.9.09 @ 2:55PM
"Hamilton drafted numerous provisions to ensure solvency, transparency and fiscal restraint on the part of the federal government."
Well, Mr. Issa. The least you could do is to cosign HR 1207 which would do just that.
Len| 6.9.09 @ 7:09PM
Mr. Issa rather than writing a column here, you should be at mininum moving to impeach the usurper who is acting so unconstitutionally. Is there anything this man has done yet that does not constitute malfeasance and maladministration.
One might argue that seeking to initiate impeachment hearings would be futile, or even portray the whigs in a worse light. I say that those who will not oppose with all means this continued illegal takeover of our rights (life, liberty and property/fruit of labor) do not merit being in leadership. Is not your responsibility to the people to do what is right?
I will even say more, and that is that we have gone so far in violation of the rule of law, of the constraints of the US constitution, that the rights of the people which government is fashioned to protect are so grossly infringed upon that we ourselves have been forced to the only recourse when one party violates the legally binding agreement, and there is no one to mediate, that of arms. Where do you stand Mr. Issa?
Pingback| 6.10.09 @ 12:18AM
Watchtower Headlines – June 10, 2009 « All Along The Watchtower links to this page. Here’s an excerpt: