I think Geithner has lived in a bubble most of his life. His shirking of his tax obligations when working overseas was the first clue. His stumbling as the Treasury Secretary was another indication. Now, the report of the TARP Inspector General with regards to AIG provides still more support for this position.
The problem in the AIG situation began with Geinthner's belief that the government would not have to intervene, the private sector would take care of the matter and there would not be a bankruptcy. Thus, there was no Plan B when help did not emerge from the private sector. As a result, Geithner accepted the deal no private organization wanted and threw in an extra $10 billion. To add frosting to the cake, the deal was not workable, the interest rate was impossible for AIG to pay. So, Geithner and company at the NY Fed decided to get $40 billion from TARP to reduce the principal. They also created a special purpose vehicle, Maiden Lane III, to releive the pressure of the CDOs held by AIG. This SPV simply bought the CDOs at the contract price, which was quite a bit above market price. They initially tried to get a deal, but backed down at almost the first refusal.
The NY FED and company either forgot or refused to use any of the massive leverage they had over the situation. It seemed to be a case where the guys in deep shit were, in fact, calling the shots. The AIG counterparties got considerable cash - our cash - because of Geithner's lack of deal-making prowess. What did we get? What will we get? When?
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