Last Updated Jan 11, 2010 2:26 PM EST
Unfortunately lawmakers are lining up the wrong target: Treasury Secretary Tim Geithner. The White House has said that Geithner had nothing to do with the series of emails that hinted at hushing up the terms and the recipients of AIG's counterparties in that federal bailout, and the Obama administration has again expressed confidence in Geithner. By contrast, the fingerprints of investment bank Goldman Sachs are all over the smoking gun.
Former AIG CEO Hank Greenberg told the Wall Street Journal''s Holman Jenkins that Goldman and other Wall Street firms created those subprime mortgage insurance packages, and then suckered AIG into insuring literally trillions of them, not only against default, but against any decline in ratings. Those policies are the infamous "credit default swaps."
Then in 2005 a key trade group drafted new standards for credit default swaps. Instead of having to pay off losses at maturity, AIG would have to pay its counterparties - including Goldman - in cash when they lost value.
Here's an analogy: What would happen if every time your home lost value, as in a recession, the bank upped your mortgage? AIG was caught in a similar vice, Greenberg suggests. And he goes even further. He intimates that Goldman, or another investment bank, might have been behind the trade group's decision to alter those standards.
The rest of the story is history. The Washington Post showed through a series of emails between AIG and its trading partners how Goldman and other investment banks put the squeeze on AIG to pay up as soon as the housing market, and the value of the swaps, started to plunge in 2007. Other investigations showed that Goldman and other banks played hardball after the federal bailout, refusing to take anything less than 100 percent of what they were owed by AIG.
But the question of who was ultimately responsible is still unresolved. Do we look at Geithner or above his pay grade? After all, the treasury secretary at the time was former Goldman Sachs CEO Henry Paulson. The chairman of the New York Fed, which negotiated the deal, was Stephen Friedman, another former Goldman CEO. Incidentally, Friedman bought Goldman stock shortly after the bailout.