Warning: This is Not Another Wall Street Conspiracy Theory, These are the FactsRead the rest here
Just last week, the House Committee on Oversight and Government Reform held a hearing on the U.S. Federal Reserve's decision to directly pay billions of dollars to banks as part of its scheme to bail out insurance giant American International Group Inc.
According to committee Chairman, D-Ohio, the testimony that congressmen heard just didn't "pass the smell test."
A Conspiracy Theory You Can't Laugh Off
The same day that AIG received the $85 billion taxpayer infusion back in September 2008, Goldman Sachs Chief Financial Officer David A.Viniar said he "would expect the direct input of our credit exposure to both of them [referring also to bankrupt Lehman Brothers Holdings (OTC: LEHMQ)] to be immaterial."
Goldman officials had been telling every analyst or journalist who would listen that the investment bank was hedged against any counterparty risk. But what Goldman officials weren't saying at the time was that the company was also hedged against AIG going bust. How? The company had purchased credit-default-swap insurance on AIG's demise.
We know that is true because Stephen Friedman - the former Goldman CEO and onetime New York Fed chairman who was called to testify at the hearing - said so.
Attached to Friedman's "Factors Affecting Effects to Limit Payments to AIG Counterparties: Prepared Testimony of Stephen Freidman Jan. 27, 2010," was a "Chronology of Selected Events and Disclosures."
That chronology included a reference to an Oct. 31, 2008 Wall Street Journal article that Friedman specifically chose to illustrate that it was common knowledge that Goldman was not in need of any government assistance, and wouldn't be in any danger if AIG were to fail. This Journal excerpt included by Friedman contained the statement: "Goldman hedged its exposure by making a bearish bet on AIG, buying credit-default swaps on AIG's own debt, according to one person knowledgeable about this move."
Friedman was called to testify for one very key reason: At the time of the payments to the counterparties, he was chairman of the board of the New York Fed, which authorized those payments. But that's not all. As a member of the board of directors and a former CEO of Goldman Sachs, Friedman would no doubt have had an excellent idea of the investment bank's exposure to AIG - as well as what it stood to gain from those payments.
Freidman subsequently resigned from his post at the New York Fed on May 7, 2009, in response to criticism of his December 2008 purchase of $3 million of Goldman stock, which added to his substantial holdings - a purchase made only after he had ushered through Goldman's approval to become a bank-holding company, enabling the firm to feed at the Fed's generous liquidity trough.
Friedman continues to serve on Goldman's board. But that's another story.
This whole affair raises scores of questions. Last week's hearing before Congress drove that point home. In fact, as I watched the testimony, I realized that our elected representatives didn't even know the correct questions to ask. That's why it's time to write your congressmen and tell them to ask:
- Why didn't the Treasury Department make the required margin calls - if they were needed - and stand to get collateral back if the insured CDOs rose in value?
- Why did the New York Fed buy paper at 50 cents on the dollar and pay banks 100 cents, when they had no idea what the intrinsic value of those securities was at the time?
- Who really leaned on the New York Fed to not disclose who got our taxpayer money?
- What did Stephen Friedman know about the payments to Goldman?
- What records exist of correspondence between Friedman and Timothy Geithner, who was then president of the New York Fed?
- What records exist of correspondence between Friedman and Henry M. Paulson, Geithner's predecessor as Treasury secretary and a former Goldman CEO himself.
- If Goldman was really hedged as Friedman appeared to claim, then why did taxpayers pay the investment bank 100 cents on the dollar?
- Did Goldman (and others) drive down the value of securities to collect cash, demand to be made whole and at the same time buy credit-default-swap insurance on AIG, which they were helping to sink?
- Can we see the trade blotters of Goldman's trading desks to determine what trading strategy those traders employed during this period and later when making record profits?
- Why are so many Goldman Sachs people in so many powerful government positions?
- Why has the United States government allowed a cabal of financial interests to hijack America?
Let's add to that this news from an interview with David Yerushalmi, senior litigator on the Murray v. Geithner et al lawsuit. Market-ticker guy Karl explains the situation more here.
Disclaimer: I profoundly dislike Frank Gaffney but kudos to him for bringing this to our attention.
YERUSHALMI: So here’s what we find out in the midst of discovery when we depose the Treasury Department’s deponent and the Fed and get documents, here’s what we’ve learned:
The Federal Reserve Bank of New York at the time that it structured the debt that it was going to give AIG insisted that not only did it get the debt, not only would it get principal and interest payments and collateral for that, it wanted 80% of AIG, precisely 77.9% of the shares and the voting rights. But the Federal Reserve Bank and Geithner knew that it was illegal for the Fed system whether there’s a Fed or the Federal Reserve Bank of New York to own that, so what did they do? They created this independent trust.
GAFFNEY: The same was true of Treasury right?
YERUSHALMI: Well that’s exactly right. You would think that if they couldn’t own it maybe they could’ve got the Treasury Department. But the Treasury Department had no legislative authority to take equity from AIG either. So what did they do? They came and opened up a discount window but created a so-called “independent trust” and they hired three trustees, and they insisted that these people were independent non-governmental actors, no conflicts of interests. But in crafting the trust agreement they slipped in a barely noticed provision of the trust agreement which said “Oh by the way, the Fed controls the trust completely, its terms and effectively the trustees.” Under anybody’s rendition of trust law this is not a valid trust, this is simply a ruse or an artifice for the Federal Reserve Bank. The second–
GAFFNEY: Which makes the proposition- David we’re just about out of time. Which makes what they did as I understand it from a technical, legal sense, money laundering.
YERUSHALMI: Exactly right, if you try to do something which is illegal, gaining control of ownership by the Federal Reserve Bank of AIG which was not authorized through a fraudulent artifice then you have violated- that’s a classic violation of money laundering.