A Tale of Two Treasuries

Rep. Darrell Issa
The American Spectator
6/8/09

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.