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The Real AIG Scandal

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It’s not the bonuses. It’s that AIG’s counterparties are getting paid back in

By Eliot Spitzer
Tuesday, March 17, 2009

Everybody is rushing to condemn AIG’s bonuses, but this simple scandal is obscuring
the real disgrace at the insurance giant: Why are AIG’s counterparties getting
paid back in full, to the tune of tens of billions of taxpayer dollars?

For the answer to this question, we need to go back to the very first decision
to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson,
then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein,
and Fed Chairman Ben Bernanke last fall. Post-Lehman’s collapse, they feared
a systemic failure could be triggered by AIG’s inability to pay the counterparties
to all the sophisticated instruments AIG had sold. And who were AIG’s trading
partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan
Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes. So now we know
for sure what we already surmised: The AIG bailout has been a way to hide an
enormous second round of cash to the same group that had received TARP money

It all appears, once again, to be the same insiders protecting themselves against
sharing the pain and risk of their own bad adventure. The payments to AIG’s
counterparties are justified with an appeal to the sanctity of contract. If
AIG’s contracts turned out to be shaky, the theory goes, then the whole edifice
of the financial system would collapse.

But wait a moment, aren’t we in the midst of reopening contracts all over the
place to share the burden of this crisis? From raising taxes–income taxes
to sales taxes–to properly reopening labor contracts, we are all being
asked to pitch in and carry our share of the burden. Workers around the country
are being asked to take pay cuts and accept shorter work weeks so that colleagues
won’t be laid off. Why can’t Wall Street royalty shoulder some of the burden?
Why did Goldman have to get back 100 cents on the dollar? Didn’t we already
give Goldman a $25 billion capital infusion, and aren’t they sitting on more
than $100 billion in cash? Haven’t we been told recently that they are beginning
to come back to fiscal stability? If that is so, couldn’t they have accepted
a discount, and couldn’t they have agreed to certain conditions before the AIG
dollars–that is, our dollars–flowed?

The appearance that this was all an inside job is overwhelming. AIG was nothing
more than a conduit for huge capital flows to the same old suspects, with no
reason or explanation.

So here are several questions that should be answered, in public, under oath,
to clear the air:

What was the precise conversation among Bernanke, Geithner, Paulson, and Blankfein
that preceded the initial $80 billion grant?

Was it already known who the counterparties were and what the exposure was
for each of the counterparties?

What did Goldman, and all the other counterparties, know about AIG’s financial
condition at the time they executed the swaps or other contracts? Had they done
adequate due diligence to see whether they were buying real protection? And
why shouldn’t they bear a percentage of the risk of failure of their own counterparty?

What is the deeper relationship between Goldman and AIG? Didn’t they almost
merge a few years ago but did not because Goldman couldn’t get its arms around
the black box that is AIG? If that is true, why should Goldman get bailed out?
After all, they should have known as well as anybody that a big part of AIG’s
business model was not to pay on insurance it had issued.

Why weren’t the counterparties immediately and fully disclosed?

Failure to answer these questions will feed the populist rage that is metastasizing
very quickly. And it will raise basic questions about the competence of those
who are supposedly guiding this economic policy.

Eliot Spitzer is the former governor of the state of New York.

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Eliot Spitzer published a scathing indictment of the Bush
Administration via an editorial in the Washington Post just before
his sexual escapades were made known, by the FBI, to the New York Times
read that editorial below.

And see this article, for one interesting analysis: Why
Bush Watergated Eliot Spitzer
, By F. William Engdahl, 17 March 2008

The spectacular and highly bizarre release of secret FBI wiretap data to
the New York Times exposing the tryst of New York state Governor, Eliot Spitzer,
“No.9″ with a luxury call-girl, had less to do with the Bush Administration’s
high moral standards for public servants. Spitzer was the target of a White
House and Wall Street dirty tricks operation to silence one of its most dangerous
critics in handling the current financial market Tsunami crisis.

A useful rule of thumb in evaluating spectacular scandals around prominent
public figures is to ask what and who might want to eliminate that person.
In the case of Governor Spitzer, a Democrat, it is clear that the spectacular
“leak” of government FBI wiretap records showing that Spitzer
paid a high-cost prostitute $4,300 for what amounted to an hour’s personal
entertainment, was politically motivated. Why?, is the interesting question.
(Continued … )


Predatory Lenders’ Partner in Crime
How the Bush Administration Stopped the States From Stepping In to Help Consumers

By Eliot Spitzer
Thursday, February 14, 2008; Page A25
Washington Post

Several years ago, state attorneys general and others involved in consumer
protection began to notice a marked increase in a range of predatory lending
practices by mortgage lenders. Some were misrepresenting the terms of loans,
making loans without regard to consumers’ ability to repay, making loans with
deceptive "teaser" rates that later ballooned astronomically, packing
loans with undisclosed charges and fees, or even paying illegal kickbacks.
These and other practices, we noticed, were having a devastating effect on
home buyers. In addition, the widespread nature of these practices, if left
unchecked, threatened our financial markets.

Even though predatory lending was becoming a national problem, the Bush administration
looked the other way and did nothing to protect American homeowners. In fact,
the government chose instead to align itself with the banks that were victimizing

Predatory lending was widely understood to present a looming national crisis.
This threat was so clear that as New York attorney general, I joined with
colleagues in the other 49 states in attempting to fill the void left by the
federal government. Individually, and together, state attorneys general of
both parties brought litigation or entered into settlements with many subprime
lenders that were engaged in predatory lending practices. Several state legislatures,
including New York’s, enacted laws aimed at curbing such practices.

What did the Bush administration do in response? Did it reverse course and
decide to take action to halt this burgeoning scourge? As Americans are now
painfully aware, with hundreds of thousands of homeowners facing foreclosure
and our markets reeling, the answer is a resounding no.

Not only did the Bush administration do nothing to protect consumers, it
embarked on an aggressive and unprecedented campaign to prevent states from
protecting their residents from the very problems to which the federal government
was turning a blind eye.

Let me explain: The administration accomplished this feat through an obscure
federal agency called the Office of the Comptroller of the Currency (OCC).
The OCC has been in existence since the Civil War. Its mission is to ensure
the fiscal soundness of national banks. For 140 years, the OCC examined the
books of national banks to make sure they were balanced, an important but
uncontroversial function. But a few years ago, for the first time in its history,
the OCC was used as a tool against consumers.

In 2003, during the height of the predatory lending crisis, the OCC invoked
a clause from the 1863 National Bank Act to issue formal opinions preempting
all state predatory lending laws, thereby rendering them inoperative. The
OCC also promulgated new rules that prevented states from enforcing any of
their own consumer protection laws against national banks. The federal government’s
actions were so egregious and so unprecedented that all 50 state attorneys
general, and all 50 state banking superintendents, actively fought the new

But the unanimous opposition of the 50 states did not deter, or even slow,
the Bush administration in its goal of protecting the banks. In fact, when
my office opened an investigation of possible discrimination in mortgage lending
by a number of banks, the OCC filed a federal lawsuit to stop the investigation.

Throughout our battles with the OCC and the banks, the mantra of the banks
and their defenders was that efforts to curb predatory lending would deny
access to credit to the very consumers the states were trying to protect.
But the curbs we sought on predatory and unfair lending would have in no way
jeopardized access to the legitimate credit market for appropriately priced
loans. Instead, they would have stopped the scourge of predatory lending practices
that have resulted in countless thousands of consumers losing their homes
and put our economy in a precarious position.

When history tells the story of the subprime lending crisis and recounts
its devastating effects on the lives of so many innocent homeowners, the Bush
administration will not be judged favorably. The tale is still unfolding,
but when the dust settles, it will be judged as a willing accomplice to the
lenders who went to any lengths in their quest for profits. So willing, in
fact, that it used the power of the federal government in an unprecedented
assault on state legislatures, as well as on state attorneys general and anyone
else on the side of consumers.

The writer is governor of New York.

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