Government Admits AIG Folly

Brace yourselves for a shocking report from the U.S government: After months of research and we don’t even want to know how much money, an independent investigator has concluded that the government wasted a ton of money bailing out AIG.

You don’t say!

Special Inspector General Neil Barofsky, the man tasked with policing the TARP, released a report last week that focused on the transactions between the New York Fed, led by Tim Geithner, and AIG’s counterparties. As was evident to, ummm… everyone, Barofsky concluded that the Fed blew it by not demanding any concessions from the major holders of AIG credit default swaps — like Hank Paulson’s alma mater, Goldman Sachs. The N.Y. Fed paid out these contracts in full even though they would have been worth far less had Mr. Geithner not stepped in and bailed out AIG. That cost the American taxpayer “tens of billions of dollars,” the report finds.

“Geithner’s already tattered reputation took a major blow with his investigation,” Dan Amoss notes. “He does not come out looking so good. I wouldn’t be surprised if President Obama replaced Geithner in 2010, given the mounting evidence that he was handing out taxpayer money and guarantees willy-nilly during the 2008 AIG panic.

“With more information about the performance of loans and mortgages in the coming months, the market’s attention could easily shift back to the capital adequacy of the U.S. banking system. And with waning political support for government subsidies, bank executives may have to start taking their lumps the old-fashioned way: raise as much dilutive equity capital as necessary to absorb credit losses. Bank shareholders and bondholders — not taxpayers — should be responsible for their own lending follies.

“Bank stocks are among the riskiest stocks to own.”

The Daily Reckoning