ÿþ<html> <head> <meta http-equiv="content-type" content="text/html;charset=iso-8859-1"> <title>OnlineColumnist&reg;.com: Duke's Damage Control</title> <meta name="generator" content="Adobe GoLive 4"> <style type="text/css"> .style1 { font-size: x-large; font-weight: bold; } </style> </head> <body bgcolor="white" vlink="black"> <center> <table cool width="624" height="2719" border="0" cellpadding="0" cellspacing="0" gridx="16" showgridx gridy="16" showgridy> <tr height="79"> <td width="116" height="118" rowspan="2" valign="top" align="left" xpos="0"><a href="aboutdiscobolos.html"><img height="110" width="62" src="images/discobolos.logo.transp.gif" border="0"></a></td> <td width="24" height="118" rowspan="2"></td> <td width="465" height="79" colspan="2" valign="top" align="left" xpos="140"><img height="75" width="450" src="images/banner.GIF"></td> <td width="18" height="118" rowspan="2"></td> <td width="1" height="79"><spacer type="block" width="1" height="79"></td> </tr> <tr height="39"> <td width="182" height="39"></td> <td width="283" height="39" valign="top" align="left" xpos="322"><a href="aboutdiscobolos.html"><img height="14" width="267" src="images/divisionofNEW.GIF" border="0"></a></td> <td width="1" height="39"><spacer type="block" width="1" height="39"></td> </tr> <tr height="26"> <td width="624" height="26" colspan="6" valign="top" align="left" xpos="0"> <table border="0" width="100%" bgcolor="black" cellspacing="0"> <tr> <td> <table border="0" width="100%" bgcolor="#99ffcc" cellspacing="0" cellpadding="4"> <tr> <td align="center"> <div align="left"> <a href="index.html"><font face="Arial,Helvetica,Geneva,Swiss,SunSans-Regular" size="2"><strong>HOME</strong></font></a><font face="Arial,Helvetica,Geneva,Swiss,SunSans-Regular" size="2"><strong> &#149; <a href="articlesindex.html">ARTICLES</a> &#149; <a href="books.html">BOOKS</a> &#149; <a href="teflon.html">THE </a><a href="teflon.html">TEFLON</a><a href="teflon.html"> REPORT</a> &#149; <a href="mailto:letters@onlinecolumnist.com">REACTIONS</a> &#149; <a href="aboutdiscobolos.html">ABOUT DISCOBOLOS</a></strong></font></div> </td> </tr> </table> </td> </tr> </table> </td> </tr> <tr height="1"> <td width="116" height="2574" rowspan="2" valign="top" align="left" xpos="0"><img height="172" width="111" src="images/johninframe3.jpg"></td> <td width="489" height="1" colspan="3"></td> <td width="18" height="2574" rowspan="2"></td> <td width="1" height="1"><spacer type="block" width="1" height="1"></td> </tr> <tr height="2573"> <td width="489" height="2573" colspan="3" align="left" xpos="116" content valign="top" csheight="2573"> <font face="Arial,Helvetica,Geneva,Swiss,SunSans-Regular" size="5"><b> <br /> Geithner&#39;s Hot Seat</b></font> <p><font face="Arial,Helvetica,Geneva,Swiss,SunSans-Regular"><b>by John M. Curtis<br> (310) 204-8700</b><br> </font></p> <p><font size="2" face="Arial,Helvetica,Geneva,Swiss,SunSans-Regular"><i>Copyright March 24, 2009<br> All Rights Reserved.</i></font></p> <p><span style="mso-tab-count:1">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</span><span class="style1">S</span>ince approving payouts of retention bonuses March 10 for cash-strapped American International Group, Treasury Secretary Timothy Geithner has symbolized all that s wrong with Wall Street.<span style="mso-spacerun: yes">&nbsp; </span>Geithner, after all, was, as head of the New York Fed, intimately involved with former Treasury Secretary Hank Paulson and Federal Reserve Board Chairman Ben Bernanke s original $700 billion bailout plan where the Bush administration refused to identify the largest recipients of government largess in U.S. history.<span style="mso-spacerun: yes">&nbsp; </span>Dragged before Rep. Barney Frank s (D-Mass.) House Financial Services Committee, Geithner continues to take heat from disgusted House members.<span style="mso-spacerun: yes">&nbsp; </span>  AIG highlights broad failures of our financial system, Geithner told Frank s committee.<span style="mso-spacerun: yes">&nbsp; </span> We must ensure that our country never faces this situation again, asking the House for fresh regulatory authority.</p> <p class="MsoNormal"> <![if !supportEmptyParas]>&nbsp;<![endif]><span style="mso-tab-count:1">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span>Geithner asked for broad new powers with financial institutions, comparable to those of the Federal Deposit Insurance Corporation, allowing government regulators to seize institutions under specific circumstances.<span style="mso-spacerun: yes">&nbsp; </span>Only banks, regulated by the FDIC, fall in the current regulatory scheme.<span style="mso-spacerun: yes">&nbsp; </span>Granting Geithner more power won t fix the fatal flaw in the system created in 1999 when the Congress, supported by former President Bill Clinton, passed Nov. 12, 1999 the Gramm-Leach-Biley Act, repealing the 1933 Glass-Steagall Act, prohibiting banks from stock market investing.<span style="mso-spacerun: yes">&nbsp; </span>Geithner asks for more regulatory authority without reinstating Glass-Steagall, a necessary first step in fixing the flawed regulatory system.<span style="mso-spacerun: yes">&nbsp; </span>AIG pushed  credit default swaps a type of insurance for collateralized mortgage obligations, Wall Street s once highly risky and profitable derivative investments.</p> <p class="MsoNormal"> <![if !supportEmptyParas]>&nbsp;<![endif]><span style="mso-tab-count:1">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span>AIG was fed businesses worldwide by Goldman Sachs, the primary investment firm originating and pushing derivative investing.<span style="mso-spacerun: yes">&nbsp; </span>Before AIG executives received the most recent $165 million in retention bonuses, they paid Goldman Sachs $12.9 billion, France s Société Général $11.9 billion, Germany s Deutsche Bank $11.8 billion, England s Barclays $8.5 billion, totaling payments of $105.3 billion between Sept. and Dec. 2008.<span style="mso-spacerun: yes">&nbsp; </span>AIG s operation spanned over 130 countries with over 73 million customers, insuring risky investments for some of the world s biggest financial firms.<span style="mso-spacerun: yes">&nbsp; </span>When the real estate bubble popped last summer and derivative investments vaporized, AIG was left holding the bag, unable to pay out vast sums of cash guaranteeing risky derivative investments.<span style="mso-spacerun: yes">&nbsp; </span>When the real estate market boomed, no one worried about the collapse of the derivative market.</p> <p class="MsoNormal"> <![if !supportEmptyParas]>&nbsp;<![endif]><span style="mso-tab-count:1">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span>AIG s exposure was so badly out of whack it threatened the entire global financial system.<span style="mso-spacerun: yes">&nbsp; </span> Its failure could have resulted in a 1930s-style global financial meltdown, with catastrophic implications for production, income and jobs, Bernanke told Frank s committee, justifying Fed and Treasury actions to rescue AIG.<span style="mso-spacerun: yes">&nbsp; </span>Bernanke announced the Fed s $1 trillion rescue plan designed to clean toxic assets from banks balance sheets.<span style="mso-spacerun: yes">&nbsp; </span>Wall Street responded with a furious rally, jumping the Dow Jones Industrial Average March 23 nearly 500 points.<span style="mso-spacerun: yes">&nbsp;&nbsp;&nbsp; </span>Wall Street s big investors jumped back into the market, hoping that financial stocks had recovered from last month s lows.<span style="mso-spacerun: yes">&nbsp; </span>An estimated $10 trillion has already been paid to various institutions reeling from the collapse of U.S. financial markets.<span style="mso-spacerun: yes">&nbsp; </span>U.S. budget deficits continue to spin out of control, now estimated at more than $1.6 trillion.</p> <p class="MsoNormal"> <![if !supportEmptyParas]>&nbsp;<![endif]><span style="mso-tab-count:1">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span>Worldwide capital markets looked unfavorably on growing U.S. debt and budget deficits, causing oil prices to spike and the U.S. dollar to weaken.<span style="mso-spacerun: yes">&nbsp; </span> As we have seen with AIG, distress at large, interconnected, non-depository institutions can pose systemic risks just as distress at banks can, said Geithner, begging the House for more regulatory authority.<span style="mso-spacerun: yes">&nbsp; </span>Geithner hasn t leveled with American public about how the end of Glass-Steagall robbed the government of necessary regulatory authority to prevent banks from speculating with depositors money.<span style="mso-spacerun: yes">&nbsp; </span> AIG shouldn t have jumped into insuring risky derivative investments promoted by Goldman Sachs and other less regulated investment banks.<span style="mso-spacerun: yes">&nbsp; </span>Selling mortgage default swaps proved highly profitable until the derivative market collapsed and AIG was left with whopping payouts to cover banks decimated by the real estate collapse.</p> <p class="MsoNormal"> <![if !supportEmptyParas]>&nbsp;<![endif]><span style="mso-tab-count:1">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span>Geithner and Beranke blamed the latest Wall Street disaster on a lack of regulatory authority.<span style="mso-spacerun: yes">&nbsp; </span>They asked Congress for the ability to place insolvent non-depository institutions into a type of FDIC receivership to prevent the contractual payouts to undeserving executives.<span style="mso-spacerun: yes">&nbsp; </span>Fed Chairman Bernanke balked on withholding retention bonuses when legal advisors cautioned against costly lawsuits.<span style="mso-spacerun: yes">&nbsp; </span> Quite differently.<span style="mso-spacerun: yes">&nbsp; </span>It could have been take into receivership or conservatorship .<span style="mso-spacerun: yes">&nbsp; </span>. . The bonus issue would not have arisen, said Bernanake, missing the real issue behind improved government regulation.<span style="mso-spacerun: yes">&nbsp; </span>Paying out $165 million paled in comparison to the unthinkable losses due to AIG insuring highly risky derivatives.<span style="mso-spacerun: yes">&nbsp; </span>Neither AIG nor any responsible bank should be allowed to speculate with depositors money.<span style="mso-spacerun: yes">&nbsp; </span>Geithner and Bernanke need to focus on reinstating Glass-Steagall.</p> <p><u><b>About the Author</b></u></p> <p><b>John M. Curtis</b> writes politically neutral commentary analyzing spin in national and global news. He's editor OnlineColumnist.com and author of <a href="books.html">Dodging The Bullet</a> and <a href="books.html">Operation Charisma</a>.<br> </p> <p></p> </td> <td width="1" height="2573"><spacer type="block" width="1" height="2573"></td> </tr> <tr height="1" cntrlrow> <td width="116" height="1"><spacer type="block" width="116" height="1"></td> <td width="24" height="1"><spacer type="block" width="24" height="1"></td> <td width="182" height="1"><spacer type="block" width="182" height="1"></td> <td width="283" height="1"><spacer type="block" width="283" height="1"></td> <td width="18" height="1"><spacer type="block" width="18" height="1"></td> <td width="1" height="1"></td> </tr> </table> <table border="0" cellpadding="0" cellspacing="2" width="597"> <tr> <td><font size="1" face="Arial,Geneva,Helvetica"> <hr noshade size="1"> </font><a href="index.html"><font face="Arial,Helvetica,Geneva,Swiss,SunSans-Regular" size="2"><strong>Home</strong></font></a><font face="Arial,Helvetica,Geneva,Swiss,SunSans-Regular" size="2"><strong> || <a href="articlesindex.html">Articles</a> || <a href="books.html">Books</a> || <a href="teflon.html">The Teflon Report</a> || <a href="mailto:letters@onlinecolumnist.com">Reactions</a> || <a href="aboutdiscobolos.html">About Discobolos</a></strong></font> <div align="left"> <p><font size="1" face="Arial,Helvetica,Geneva,Swiss,SunSans-Regular">This site designed, developed and hosted by the experts at</font><font size="2" face="Arial,Helvetica,Geneva,Swiss,SunSans-Regular"> <a href="http://www.cmeonline.net" target="_blank"><img height="30" width="138" src="images/cmelogoANIM.gif" border="0" align="absmiddle"></a></font></p> </div> <p><font size="2" face="Arial,Helvetica,Geneva,Swiss,SunSans-Regular">&copy;1999-2002 <a href="aboutdiscobolos.html">Discobolos Consulting Services, Inc.</a><br> (310) 204-8300<br> All Rights Reserved. </font></td> </tr> </table> </center> </body> </html>