Tim Geithner, AIG, and Sarbanes-Oxley For The Feds

Today we will try and link together three rather diverse concepts: the Treasury Secretary, an insurance company, and an accounting law. The Treasury Secretary is Tim Geithner, formerly the head of the Federal Reserve Board Of New York and one of the many Obama Cabinet nominees that had failed to properly pay his taxes. Recent reports from the Associated Press and other sources have shown that there may have been some shady dealings going on between the Federal Reserve Board of New York and an insurance company, AIG, during the frenzy of giving away taxpayer money to financial institutions last year. The details include the following:

• AIG was one of the biggest insurers in the world and was positioned by those in political power to be "too big to fail," i.e. if AIG went under, a single company, all of the world's financial markets would crumble.


• The American taxpayer is on the hook to AIG's survival for about $180 billion. Put another way, each American household donated about $1,400 to keep AIG afloat.


• Many of the financial assets that the big banks purchased through the years were bonds backed by subprime mortgages and other questionable loans. These banks bought insurance from AIG as a precaution in case the loans went bad.


• The majority of the loans went sour, causing the great financial losses for most banks. This meltdown in assets lead to TARP and the giveaway of billions of dollars to the banks, rewarding them for making horrible investments. As we have discussed this past week, the fact that most of these bailouts have already been repaid just months after having been received indicates that the danger to the banking system was grossly exaggerated.

This is where Geithner and the New York Fed comes into play. As the investments went bad, the banks came to AIG to exercise their insurance policies. However, AIG was no longer financially sound either and could not cover the entire value of the insurance policies they had sold to the banks. In cases like this, negotiations are usually started with a bankrupt-approaching company by its creditors to see what percentage of their stake they can get back. For example, let's assume that AIG could only cover 20% of the face value of its policies. After much negotiation, probably some lawsuits, the plaintiffs, i.e. the banks, would have to reach a settlement, picking over the 20% carcass that was once AIG.

However, it appears that the Fed and possibly Geithner did not allow this negotiation process of downgrading the returns to the banks to occur, using taxpayer money to pay out the AIG insurance policies at 100% of face value. This is in contrast to the Bush bailout of GM and Chrysler, both of which had to make many concessions from both management and the unions before they could receive any taxpayer money. There were no concessions from the banks holding AIG policies, they just got everything they wanted.

And it gets worse. According to a January 8, 2010 Associated Press report, email exchanges between lawyers for the New York Fed and AIG show that "the New York Fed wanted AIG to withhold information about deals that sent billions from the taxpayer bailout of AIG to Goldman Sachs, Inc., Societe Generale and other major banks." Thus, not only was there possibly a big and unnecessary giveaway of taxpayer dollars, there may be a cover up to the giveaway. Congress, as always late to the party, is scheduling hearings to address both the lack of negotiations and the suppressing of information. Congressman Darrell Issa correctly questions the lack of transparency and accountability regarding taxpayer assets in this matter.

Which leads us Sarbanes-Oxley. This bill was passed as a result of the gross accounting violations that occurred during the Clinton administration that resulted in a few people getting very rich, but eventually going to jail, and causing companies to fail, employees to lose both their jobs and their pension investments, and the passage of an onerous bill that does nothing but waste American business resources. Sarbanes-Oxley requires that a public company produce a ton of backup accounting materials attesting to the accuracy of their corporate books. These reporting requirements take up a lot of personnel and other corporate resources that could be better deployed by making American business more competitive. The tragedy of this law is twofold:

• First, the vast majority of the materials are never reviewed by anyone. They have to be produced but do not have to be reviewed by the government. What a waste.


• Second, the law apparently does not work. It did not produce the right documents and accounting indicators for companies such as AIG, Lehman Brothers, Bear Sterns, and other financial firms that quickly went out of business. One would think that an accounting law supposedly designed to provide investors a true picture of a firm's financial health would have been able to flag the horrible financial status of those Wall Street firms that went belly up so quickly.

Thus, we have a government running amok and wasting taxpayer money without any accounting and transparency controls in place and we have a Federal law with too many of the wrong controls in place since they do not work, as witnessed by the sudden bankruptcies of the financial firms. Thus, we did need to do two things with the Sarbanes Oxley principles as outlined in "Love My Country, Loathe My Government:"

Step 46 - Subject all government agencies, including Congress, to a strict auditing process, similar to Sarbanes-Oxley procedures, to ensure prudent use of taxpayer assets and funds. In this step we are hoping for accounting procedures that work, i.e. they are rigid, thorough and identify fraud and waste, as opposed to the current Sarbanes-Oxley law for businesses that is rigid, thorough and does not identify fraud and waste. "Love My Country, Loathe My Government" has numerous examples of where this step might have save billions of dollars of taxpayer taxes if in place. This current Geithner/AIG situation would also lend itself to Step 46 by providing the details, transparency, and accountability that Congressman Issa laments is lacking.

Step 48 - Repeal the Sarbanes-Oxley law for American business immediately. The vast majority of companies in this country have never been found guilty of corporate accounting malfeasance and those that have been accused have been convicted. The recent failures of financial institutions are proof the law does not work and just wastes resources. You cannot say you have a viable accounting tracking law if a company is in business today and out of business tomorrow, e.g. Lehman Brothers, and nobody sees it coming, including the government which is supposed to track the output of Sarbanes-Oxley activities.

Another step from "Love My Country, Loathe My Government" is also applicable here:

Step 34 - Hold House and Senate committees and subcommittees accountable for their respective areas of responsibilities and remove committee members from committee posts if they do not meet minimal performance criteria. If the accusations are right and AIG did improperly funnel taxpayer dollars to healthy banking firms, those members of Congress that sit on those Congressional committees responsible for the funneling should be held accountable for the waste and be replaced immediately on the committee.

The political class needs to be introduced and subjected to the concept of accountability. They have wasted enough of our tax dollars already without any ramifications to anyone who should have known better. By making them accountable, maybe the politicians in Washington might finally anticipate a problem for once and save us all a few dollars.

Visit our website at www.loathemygovernment.com to order an autographed copy of the book, "Love My Country, Loathe My Government -Fifty First Steps To Restoring Our Freedom and Destroying The American Political Class" and to sign up for the cause. The book is also available online at Amazon and Barnes And Noble.