U.S. regulators failed investors, taxpayers

The cornerstone of integrity in markets is the requirement that players must make full, complete and timely disclosure. That inviolate rule is why the lapses by the United States' regulatory bodies themselves that have been recently revealed are both infuriating and worrisome.

The latest revelation is U.S. Secretary of the Treasury, Timothy Geithner, told AIG in 2008 to ignore disclosure laws by not revealing its bailout to counterparties involved in its credit-default swaps such as Goldman Sachs and other banks.

On Jan. 7, Bloomberg News described the suppression of information shown in a series of emails obtained by Congressman Darrell Issa, a California Republican who sits on the House Oversight and Government Reform Committee.

Bloomberg writes: "The NY Fed was in charge of negotiations between AIG and the banks in November 2008 as losses on the swaps, which were contracts tied to subprime home loans, threatened to swamp AIG despite its initial bailout. The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for US$62.1-billion of the swaps, prompting lawmakers to call the AIG rescue a 'backdoor bailout' of financial firms."

Geithner and others in emails were against disclosure of these indirect bailouts.

So one of many ironies is that in 2008 Geithner, as head of the New York Fed, was answerable to Ben Bernanke, Federal Reserve chief, who has been saying publicly that the failure to regulate financial players properly was the root cause of the collapse of the U.S. financial system.

"It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information," said Issa. Taxpayers "deserve full and complete disclosure under our nation's securities laws, not the withholding of politically inconvenient information."

Around the same time, then-Secretary of the Treasury Henry Paulson was reported to have pressured Bank of America executives to suppress information on how disastrous its takeover of Merrill Lynch was becoming. More recently was the Freddie Macincident in which government officials with the Federal Housing Finance Authority tried to persuade the mortgage giant not to disclose massive losses.

The revelation promises to make Bernanke's reappointment as head of the Federal Reserve slightly tougher but not impossible.

The failure to disclose also raises another concern.

This week, watchdog and former New York Governor Eliot Spitzer published a blog demanding the government publicly disclose online all of AIG's emails for journalists and citizens to scour. Issa's email trail is for only five months following November 2008.

"AIG -- and more specifically its credit-default swaps exposure -- was an important contributing factor to the crash of the financial markets. What sets this company apart from others that played a role in the crisis is that we, the taxpayers, own it.

As we noted in our original piece, U.S. taxpayers bought 80% of AIG when they bailed the company out with US$182-billion last year. As owners of the company, taxpayers are also owners of AIG. As owners of the company we can demand the release of these documents," wrote Spitzer.

The other issue is the level of backdoor bailout, which I have argued should be repaid by Goldman Sachs and others to taxpayers before they can pay themselves obscene bonuses again.

The emails confirm that the Fed, led by Geithner, paid Goldman Sachs Group and other banks 100¢ on the dollar even though some might have been worthless or a fraction of 100¢ on the dollar. Geithner, in testimony to the Congressional Oversight Panel, said a discount would have been catastrophic. Elizabeth Warren, head of the oversight panel, has repeatedly challenged this assertion.

Underscoring the entire mess is the unacceptable incestuousness of Wall Street and Washington. Goldman Sachs has been the master of the public service swapout as well as a master of providing lucrative employment for ex-politicians, former central bankers, unemployed finance ministers and possibly their supporters, children and goodness knows who else.

There's also this: New York Times in a recent editorial noted one of the most "aggressive creators" of "questionable investments" was a firm that answered to another company run by Lewis Sachs, now a senior advisor to Treasury Secretary Geithner.