Tag: tim geithner
U.S. Accused Of Illegal 2008 Seizure As AIG Trial Opens

U.S. Accused Of Illegal 2008 Seizure As AIG Trial Opens

Washington (AFP) – The U.S. government’s emergency actions in the financial crisis went on trial Monday as lawyers accused it of having illegally seized teetering insurance giant AIG in September 2008.

David Boies, the lawyer for Hank Greenberg, the former chairman of American International Group, sought to make a case that there was no need for the government to take the company over even if it appeared insolvent as the financial system was melting down.

Providing AIG with liquidity, as was done with banks at the time, was all that was necessary to stabilize the situation, Boies argued.

But instead the government took a step further, injecting $85 billion into the company for a nearly 80 percent share of ownership, erasing much of the value of the equity of existing shareholders.

Boies accused the government of “illegal exaction” that was backed up and justified by efforts to “demonize” the company, which Greenberg, 89, had built into the world’s largest insurer.

The government had already made a fully-secured loan to the insurer, Boies said as the trial opened.

“They had a loan that they charged extortion interest rates on… and yet they reached out to grab 79.9 percent of the AIG shareholders’ equity,” he said.

“There was especially no justification of the taking of equity.”

But government attorney Kenneth Dintzer defended the takeover, saying a collapsed AIG would have cause much more damage.

“The goal was not to save AIG. It was to save the world from AIG,” he said.

AIG shareholders were in fact helped by the rescue, he argued.

“No one can pretend they would be better off without the government’s intervention… 20 percent of something is better than 100 percent of nothing.”

Greenberg is suing the government via his Starr International Company, which was the largest single shareholder in AIG at the time of the government rescue.

Starr still holds about 1.3 percent of the company and is seeking $40 billion for its losses.

Key witnesses expected in the six-week trial include former Federal Reserve chairman Ben Bernanke and ex-New York Federal Reserve Bank President Timothy Geithner, who later became treasury secretary.

Both were instrumental in the takeover of the company, which as a privately owned insurer was not regulated by the Federal Reserve.

The trial will force Bernanke and Geithner to rehash the events of 2008, when they had to orchestrate the rescues of investment bank Bear Stears, housing finance giants Fannie Mae and Freddie Mac, and brokerage Merrill Lynch before letting Lehman Brothers collapse and then seizing AIG.

At the time they justified the takeover of a private non-bank by arguing that “a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.”

The bailout gave AIG the necessary liquidity to stay afloat, sparing the giant insurer a possible bankruptcy that could have devastated the global financial system.

At the same time, shareholders like Starr saw their stakes plummet in value by the dilution from the government, which ultimately put $182 billion into AIG.

The trial could also put in focus one of the government’s most controversial actions during the crisis that has never been clearly justified: paying out tens of billions of dollars to AIG’s counterparties in credit derivatives, including both Wall Street banks like Goldman Sachs and foreign banks like DeutscheBank.

Critics say the Fed should have demanded the counterparties accept less than the face value of their credit default swaps, since they would have gotten nothing if AIG failed.

AFP Photo/Stan Honda

Geithner: “We’re Running Out of Time”

Appearing with Senate Democrats Thursday afternoon, Treasury Secretary Tim Geithner repeatedly urged Congress to raise the debt ceiling, the federal government’s statutory authority to borrow money.

“We have no way to give Congress more time to solve this problem, and we are running out of time,” he warned, a pained visage creeping across his face. “The eyes of the world are on us…. We need to send a definitive signal that we are going to take the steps necessary to avoid default.”

The latest request came just hours after Federal Reserve Chairman Ben Bernanke told senators that the massive, speedy cuts in government spending Republicans are demanding be enacted in concert with a debt ceiling hike would stall the economy.

“I only ask … as Congress looks at the timing and composition of its changes to the budget, that it does take into account that in the very near term the recovery is still rather fragile, and that sharp and excessive cuts in the very short term would be potentially damaging to that recovery,” Bernanke told a meeting of the Senate Banking Committee.

Bernanke, a Republican appointed by George W. Bush, is siding with Democrats in Congress as the Tea Party-ruled Republican caucus continues to insist on “no tax hikes on job creators” while pushing for cuts that will inevitably hurt economic growth and stall job creation. Bernanke did not miss the opportunity to get in another plea of his own for an increase in the debt ceiling.

“It would be a calamitous outcome,” Bernanke said of failure to do so by August 2, when Geithner has said the U.S. will default. “It would create a very severe financial shock that would have effects not only on the U.S. economy, but the global economy.”

Republicans have backed themselves into a corner on this one; Wall Street, Treasury, Ben Bernanke, and every independent economic forecaster out there is closing in, demanding a dose of rationality before it is too late.

Report: Geithner Rules Out Constitutional Option on Debt Limit

Treasury Secretary Tim Geithner apparently told lawmakers in the private bipartisan debt ceiling talks yesterday that the so-called Constitutional Option, or invoking the 14th amendment guarantee that “[t]he validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned,” was not a legal means for continuing to issue new debt if Congress fails to raise the debt limit.

In addition to his warnings about the cost of a default, officials said, Mr. Geithner told the lawmakers the White House did not believe it had the authority, under the Constitution, to continue issuing debt if it reached the debt ceiling. Nobody in the room disputed Mr. Geithner’s bleak assessment, the officials said.

Liberal journalists and even some economists have been suggesting this as a means for getting around the debt limit imposed by Congress on the Treasury, but with Geithner apparently waving it off, and Laurence Tribe, a Harvard Law Professor who appeared in TV ads for Obama’s campaign in 2007, writing today this is legally untenable, all the pressure is on John Boehner and Barack Obama to make this happen.