If Treasury Secretary Timothy Geithner doesn’t know how to get appropriately compensated for the loans / bailouts that he keeps approving on behalf of the United States Government then he shouldn’t be giving out these loans at all. His mismanagement of these negotiations is wasting our money.
For instance last year, when Geithner, then operating through the New York Fed, decided to bailout AIG, the ailing insurance giant was already in negotiations with banks that would have retired their Credit Default Swaps with AIG paying 40 cents on the dollar. Once Geithner took over the negotiations, he instructed AIG to pay 100 cents on the dollar. The flubbed negotiations cost American taxpayers at least $19 billion (i.e. 60% of the $32.5 billion that AIG paid to retire the swaps).
What did we get for our money? Taxpayers saved AIG and now own 80% of its stock, but we also saved companies like Goldman Sachs by having AIG act as a conduit for their portion of the bailout money. As taxpayers, we didn’t receive any stock in Goldman, nor any of the other banks that desperately needed our money to compensate for the bad decisions and bets they had placed.
Now CIT, too, has gone into bankruptcy after receiving a $2.3 billion loan from taxpayers. The story is all too familiar. CIT was in danger of becoming insolvent, and the government decided that the potential collapse of the company was too big a risk to the economic systems, and so taxpayer money was disbursed to help prop CIT up. Here again, our point isn’t that the government shouldn’t have tried to minimize damage to the financial system, but nonetheless, there are ways to administer these bailouts while at the same time making sure that taxpayers are being appropriately compensated for the risks they are taking. If the government loans a failing company money, it only makes sense that it demand seniority on the loan. If Geithner had made this demand and stuck to it, taxpayers would be the first to be paid back after CIT’s bankruptcy. But when Geithner didn’t get that demand satisfied, and he gave the loan anyways he ended up losing 100% of the $2.3 billion of taxpayer money while senior debt holders only lost 30% of their money.
The mishandling of both the AIG and CIT bailouts point to the same conclusion: Timothy Geithner does not seem to know how to negotiate effectively and on behalf of his lenders – taxpayers. Because of his errors, tens of billions of dollars are gone and will never be recouped. The government seems to be intent on negotiating loans with terms that shouldn’t be acceptable to anyone with expertise in economic matters, and as a result, every time a large company needs help to keep from collapsing, the American taxpayer is providing an unprecedented amount of assistance only to go completely uncompensated for that help.