Members of Congress are calling for the resignation of US Secretary of Treasury Timothy Geithner over his handling of the AIG rescue last year. Geithner, as head of the New York Federal Reserve Bank at the time, authorized the transfer of $$billions in US taxpayer funds to Deutshe Bank and other financial institutions in order to make good on credit default swaps underwritten by AIG:
AIG was saved last year with a package of loans and
investments that has swelled to $182.3 billion. Banks, including
Societe Generale SA, Goldman Sachs Group Inc. and Deutsche Bank
AG, received the full value on credit-default swaps purchased
from New York-based AIG to protect against declines in mortgage-
linked investments….Yesterday, Republican Representatives Roy Blunt of Missouri
and Spencer Bachus of Alabama requested a congressional hearing
on the AIG rescue, calling it a “backdoor bailout” of the
banks that traded with the insurer.
I already wrote that Deutsche Bank had received over $11 billion from the US Treasury. Basically, the US taxpayers were punished for Deutsche Bank's poor risk management practices, for the bank was trading with an insolvent institutions. Today in the New York Times Nobel prize-winning economist Paul Krugman asks why Deutsche Bank and the others weren't force to take at least a partial loss – a "haircut" for their reckless behavior:
But was there any way to limit those liabilities? After all, banks
would have suffered huge losses if A.I.G. had been allowed to fail. So
it seemed only fair for them to bear part of the cost of the bailout,
which they could have done by accepting a “haircut” on the amounts
A.I.G. owed them. Indeed, the government asked them to do just that.
But they said no — and that was the end of the story. Taxpayers not
only ended up honoring foolish promises made by other people, they
ended up doing so at 100 cents on the dollar.
One thing is clear: Deutsche Bank has been more successful in trading with dead – "zombie" – institutions in the US than it has with trading on dead American citizens.
