ALTHOUGH the continuing Greek debt crisis and the collapse of AIG three years ago have some similarities, there is one big difference. Whereas those owed money by the Greek government will probably have to settle for roughly 50 cents on the dollar, AIG’s creditors got paid in full by American taxpayers.
The explanation initially given by the New York Fed, then led by current Treasury Secretary Timothy Geithner, was, according to a 2009 report by the special inspector general for the TARP program, that two of AIG’s biggest creditors were banks based in France. This meant that those banks were governed by French law, a provision of which made it illegal under the circumstances for the two banks to accept anything less than payment in full. As a result, because of a US law preventing unequal treatment of banks, all of AIG’s major creditors got paid in full. However, a recent report from the Government Accountability Office states that this was not the case.
Instead, the report quotes French officials who state there weren’t any legal obstacles to making the French banks take a loss, or if there were, they were far less significant than represented. In other words, the logic for paying all creditors in full was flawed from the beginning. And this flaw cost taxpayers billions.
In an interconnected world where instability in Greece causes US markets to plunge, many of the financial institutions vital to the global economy are not governed by US law. Financial regulators need to understand which obstacles this may pose and be prepared to confront them. They weren’t in 2008. In light of this new report, Geithner needs to explain to the American people where exactly the New York Fed went wrong in dealing with French banking regulators in 2008. It may have been a simple miscommunication or just a mistake by Americans economists pressured to learn French banking law on short notice. But, as a result, of this error, taxpayers were forced to spend billions more than they should have to bail out major financial institutions. And they deserve a full accounting for why.