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Tim Geithner Admits Banks Bailed Out With Rigged Libor, Costing Taxpayers Huge Amount

Huffington Post
Mark Gongloff

 Timothy Geithner claimed on Wednesday that the government had no choice during the financial crisis but to lend to banks and AIG using an interest rate, Libor, that everybody knew was flawed.

Call it a back-door bailout: By using an artificially low Libor, the government saved the banks and AIG millions, maybe billions -- and cost the taxpayers the same amount.

The use of Libor in the bailouts also rubber-stamped that hopelessly manipulated interest rate as a market measure, raising still more questions about just how worried Geithner and other regulators really were about it.

In a House Financial Services Committee hearing on Wednesday, Treasury Secretary Geithner was asked why Treasury and the Fed used the London Interbank Offered Rate as a basis for loans to insurance giant American International Group and to U.S. banks under the Term Asset-Backed Securities Loan Facility -- even though Geithner and other regulators had long suspected that Libor was artificially low, as Geithner testified.

"We were in the position of investors around the world," Geithner shrugged. "You have to choose a rate, and we did what everybody did -- use the best rate available at the time."

Geithner repeated his claim that he warned other U.S. and British regulators in the spring of 2008 about possible manipulation of the key interest rate and recommended changes to the way the rate was set.

But he also said that, months later, when it came time to set bailout terms for the Too Big To Fail Set, the government just had no other choice but to use Libor.

Sure, that's one way to look at it. Another, less charitable way to look at it is that the Fed was fully aware that Libor was being manipulated lower, and was fine charging an artificially low rate to lend money to banks and to AIG, in what amounted to yet another kind of bailout. Why make life harder for them, right? They had enough problems dealing with the crisis they had created. Raising red flags about Libor might have only made the crisis worse, making it harder for banks to borrow money.

But in the process, the government left untold mountains of cash on the table for U.S. taxpayers. Even if Libor was only manipulated a tiny bit lower, these small breaks add up.

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U.S. Drops Probe of AIG Executives

Reuters

The U.S. Justice Department has dropped a probe of American International Group Inc executives involving the credit default swaps that sent the insurer to the brink of bankruptcy and forced a huge taxpayer bailout, lawyers for the executives said on Saturday.

The investigation had centered on AIG Financial Products, which nearly brought down the giant insurer after writing tens of billions of dollars on insurance-like contracts on complex securities backed by mortgages that turned out to be toxic.

The U.S. government stepped in with a $182 billion bailout to avert a bankruptcy filing by AIG.

The criminal probe had focused on whether Joseph Cassano, who ran the financial products unit, and Andrew Forster, his deputy, knowingly misled investors about the company's accounting losses on its credit default swaps portfolio.

"Although a 2-year, intense investigation is tough for anyone, the results are wholly appropriate in light of our client's factual innocence," F. Joseph Warin and Jim Walden, Cassano's lawyers, said in a statement.

Forster's lawyers also confirmed the probe had been dropped.

"We were very pleased but not surprised to hear from the DOJ late yesterday that they were dropping the criminal investigation of our client," David Brodsky, one of Forster's lawyers, said in a statement. "In the end, the facts were stronger than the emotions surrounding AIG's problems."

The Department of Justice declined to comment.

AIG said in a statement it welcomed the decision'

The Wall Street Journal first reported on Friday that the two-year investigation, one of the highest profile of the various probes stemming from the 2008 financial meltdown, had been dropped.

The FBI and other government agencies had been looking into whether Cassano misled investors with overly optimistic forecasts about the extent of the firm's exposure to securities backed by risky subprime mortgages.

Investigators were said to have focused on a December 2007 investor presentation at which Cassano played down the market value of losses on the credit default swaps.

Over the course of the next year, AIG took writedowns of more than $40 billion on the swaps and had to put up billions more in collateral to counterparties like Goldman Sachs.

Cassano resigned under pressure in March 2008 as AIG's financial situation began to weaken.

(Additional Reporting by Jim Marshall in Chicago and Jim Vicini in Washington; Editing by Peter Cooney)