Saturday, January 9, 2010

Monday morning quarterbacking Geithner

I tend to NOT second guess either the Secretary of the Treasury or the Chairman of the Fed.  Generally speaking, I am comfortable that these individuals make decisions with substantially different information than you and I have, especially at the time they make the decisions.  Monday morning quarter-backing is way too easy.

In the latest flap over AIG and Geithner's actions while at the NY Fed, I don't think he deserves the abuse.  This is what I think happened at the time, and those who heard me ranting about this can confirm!

AIG needed huge amounts of cash quickly.  And, basically every other financial institution needed cash quickly too.  The problem: The Fed had neither a mechanism to get cash to everyone, nor a good way to determine who got how much of the cash to be distributed.

So, Congress said okay to bailing out AIG.  Geithner and his colleagues obviously knew AIG would immediately pay all the cash out the back door anyway, that's why it needed cash...AIG owed lots of counterparties HUGE payments!

Finally, I would imagine Geithner and Co didn't think too hard about which counterparties should get paid by AIG, or which banks should benefit from the AIG bailout.  They simply concluded making good on AIG's counterparty payments would at least pay off of the banks and institutions that were smart enough to hedge themselves in the first place.

Simply put: AIG became a money pump for the Fed because they had no other tool that quickly at their disposal.  They used it to pump cash to the least undeserving of the financial istitutions.

Why did he hide it?  That's obvious too!  If he had been transparent at the time, the backlash we're seeing today would have hit very hard.  AIG wouldn't have been bailed out, (I don't have a view to express on the moment!) but more importantly, there would have been no mechanism to force liquidity through the system.

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