Secretary Geithner's Got Some Explaining to Do

While everyone, including Congress, the media, and the public, have focused on AIG's $100-million bonus payments to key employees, and most recently on AIG's stealth payments to counterparties like Chase and the French giant Société Générale -- the latter made worse by the fact that it was the Federal Reserve (FED) that wanted to keep these payments hidden from public view -- the problem with the AIG bailout is much deeper and more fundamental.

Just about everyone has had something to say about this bailout -- mostly that it was an ugly but necessary step to stave off a domino effect that would have brought the world's financial system to its knees. But what we have not yet heard is just how Treasury Secretary Geithner, as then-head of the NY FED, got away with taking ownership of 77.9% of AIG's equity and voting rights in clear violation of the law.

The question we are left with is: Why? What motivated this illegal grab of AIG's equity and voting rights? Was it desperation in the face of the largest potential collapse in the history of modern finance? Was it unbridled power combined with supreme hubris? Or was it just criminal? The answer to this query resides in the as-yet-hidden files of the Federal Reserve Bank of New York, now subject to a subpoena issued by my office in the federal lawsuit Murray v. Geithner, pending in the Eastern District of Michigan.

In this lawsuit, brought on behalf of Kevin Murray, an Iraq War veteran and taxpayer, my co-counsel, Robert Muise of the Thomas More Law Center, and I have challenged the U.S. government's takeover of AIG as a violation of the Establishment Clause of the First Amendment because the taxpayer bailout has the effect of promoting and advancing AIG's Shariah-adherent insurance business -- the largest in the world. AIG promotes itself as a global advocate not only of Islam, but also of the Islamic legal doctrine known as Shariah -- which is the Islamic legal doctrine and program that calls for a global hegemony referred to as the Caliphate, the murder of apostates, and jihad against infidels. The most austere and important Islamic legal authorities who legitimize Shariah-compliant finance, like AIG's takaful insurance products, are the same ones issuing fatwas for jihad against the West.

In the course of discovery, resisted by the government at every turn, we have learned that the deal Geithner put together as the NY Fed's president was illegal on its face.

The Deal

Specifically, the deal Geithner put together in September 2008 was for the NY FED to pour up to $85 billion of debt funding into AIG to solve its liquidity crisis as the Credit Default Swap counterparties, the banks which had insured themselves against the sub-prime mortgage meltdown, demanded payments under their AIG insurance policies. AIG ended up drawing down $60 billion almost overnight.

But Geithner was not content with a straight debt deal where AIG promised to pay back principal and interest and handed over almost all of its assets as collateral. Geithner wanted real ownership and control (77.9%, to be exact) of AIG's equity and the voting rights to go along with that.

The problem Geithner knew he had to confront, however, was that the FED was not authorized to take ownership in AIG or any other financial institution. The law authorized the FED only to loan money and take collateral. While the FED might end up with ownership after a default and foreclosure on the collateral, the Federal Reserve Act does not authorize the NY Fed to structure the debt deal with an equity piece.

The Criminal Artifice

So what did Geithner do? He took equity, but he used a fictitious "Trust" to accomplish that which he could not do legally. The AIG Credit Facility Trust has three so-called independent, non-governmental trustees owning the 77.9% of the legal interests of AIG, and the Trust agreement assigns the U.S. Treasury the beneficial interests in the 77.9%. The highly-touted "independence" of the trustees is quite obviously critical to save the Trust from the claim that it is merely a ruse for FED ownership and control.

But there is only one problem with this Trust structure: It is invalid and illegal for two important reasons, not the least of which is that its independence is nonexistent.

Specifically, the Trust Agreement includes a hardly-noticed section 1.03, which gives the FED absolute authority over the Trust's existence and its terms, effectively granting the FED control over the actions of the trustees. By any legal definition, this is not a valid independent trust. This means, at the very least, that the FED is the real owner of the legal interests in 77.9% of AIG's equity, and this is, as Geithner himself testified before the Senate Banking Committee in April 2008, not legal.

But the Trust's infirmities do not stop at its lack of independence. The Trust Agreement also assigns the beneficial interests to the U.S. Treasury as the Trust's beneficiary. This assignment is patently invalid because a trust beneficiary must be a person or entity that can own title to things in its own name. But the U.S. Treasury is -- by statute, by case law, and by actual fact -- nothing more than a bank account or depository for things owned by the U.S. government. And a bank account cannot own anything.

So how and why did the dozens, if not hundreds, of government and private-sector high-priced lawyers working on this transaction make such an elementary mistake? We don't know the answer to this question yet, but we do know why they could not name the Treasury Department as the beneficiary: because like with the FED, at the time, it did not yet have legal authority to acquire an ownership interest in any of the failing financial institutions, either. That authority would come later, when Congress passed the Emergency Economic Stabilization Act, which authorizes the use of TARP funds for acquiring equity. But even that legislation instructs the Treasury Department to avoid acquiring voting rights. Geithner's deal was all about acquiring not just voting rights, but super-majority control. Unfortunately, there was no legal authority at the time to do so.

The brute fact that now standing exposed before us is the use of an invalid Trust structure to conceal the unlawful ownership and control over 77.9% of AIG's equity and voting rights by the FED. If Geithner knew he was breaking the law, then this just happens to be the definition of criminal money-laundering under Title 18, Section 1956. Secretary Geithner has some explaining to do to AIG's public shareholders. We suggest that he seek legal advice first -- but this time, from lawyers who actually know what they are doing.

David Yerushalmi is a litigator specializing in securities law and public policy and serves as General Counsel to the Center for Security Policy, a Washington, D.C.-based think-tank specializing in national security. Mr. Yerushalmi is also representing the plaintiff in Murray v. Geithner et al. in a federal lawsuit challenging the U.S. government's takeover of AIG on First Amendment-Establishment Clause grounds.
While everyone, including Congress, the media, and the public, have focused on AIG's $100-million bonus payments to key employees, and most recently on AIG's stealth payments to counterparties like Chase and the French giant Société Générale -- the latter made worse by the fact that it was the Federal Reserve (FED) that wanted to keep these payments hidden from public view -- the problem with the AIG bailout is much deeper and more fundamental.

Just about everyone has had something to say about this bailout -- mostly that it was an ugly but necessary step to stave off a domino effect that would have brought the world's financial system to its knees. But what we have not yet heard is just how Treasury Secretary Geithner, as then-head of the NY FED, got away with taking ownership of 77.9% of AIG's equity and voting rights in clear violation of the law.

The question we are left with is: Why? What motivated this illegal grab of AIG's equity and voting rights? Was it desperation in the face of the largest potential collapse in the history of modern finance? Was it unbridled power combined with supreme hubris? Or was it just criminal? The answer to this query resides in the as-yet-hidden files of the Federal Reserve Bank of New York, now subject to a subpoena issued by my office in the federal lawsuit Murray v. Geithner, pending in the Eastern District of Michigan.

In this lawsuit, brought on behalf of Kevin Murray, an Iraq War veteran and taxpayer, my co-counsel, Robert Muise of the Thomas More Law Center, and I have challenged the U.S. government's takeover of AIG as a violation of the Establishment Clause of the First Amendment because the taxpayer bailout has the effect of promoting and advancing AIG's Shariah-adherent insurance business -- the largest in the world. AIG promotes itself as a global advocate not only of Islam, but also of the Islamic legal doctrine known as Shariah -- which is the Islamic legal doctrine and program that calls for a global hegemony referred to as the Caliphate, the murder of apostates, and jihad against infidels. The most austere and important Islamic legal authorities who legitimize Shariah-compliant finance, like AIG's takaful insurance products, are the same ones issuing fatwas for jihad against the West.

In the course of discovery, resisted by the government at every turn, we have learned that the deal Geithner put together as the NY Fed's president was illegal on its face.

The Deal

Specifically, the deal Geithner put together in September 2008 was for the NY FED to pour up to $85 billion of debt funding into AIG to solve its liquidity crisis as the Credit Default Swap counterparties, the banks which had insured themselves against the sub-prime mortgage meltdown, demanded payments under their AIG insurance policies. AIG ended up drawing down $60 billion almost overnight.

But Geithner was not content with a straight debt deal where AIG promised to pay back principal and interest and handed over almost all of its assets as collateral. Geithner wanted real ownership and control (77.9%, to be exact) of AIG's equity and the voting rights to go along with that.

The problem Geithner knew he had to confront, however, was that the FED was not authorized to take ownership in AIG or any other financial institution. The law authorized the FED only to loan money and take collateral. While the FED might end up with ownership after a default and foreclosure on the collateral, the Federal Reserve Act does not authorize the NY Fed to structure the debt deal with an equity piece.

The Criminal Artifice

So what did Geithner do? He took equity, but he used a fictitious "Trust" to accomplish that which he could not do legally. The AIG Credit Facility Trust has three so-called independent, non-governmental trustees owning the 77.9% of the legal interests of AIG, and the Trust agreement assigns the U.S. Treasury the beneficial interests in the 77.9%. The highly-touted "independence" of the trustees is quite obviously critical to save the Trust from the claim that it is merely a ruse for FED ownership and control.

But there is only one problem with this Trust structure: It is invalid and illegal for two important reasons, not the least of which is that its independence is nonexistent.

Specifically, the Trust Agreement includes a hardly-noticed section 1.03, which gives the FED absolute authority over the Trust's existence and its terms, effectively granting the FED control over the actions of the trustees. By any legal definition, this is not a valid independent trust. This means, at the very least, that the FED is the real owner of the legal interests in 77.9% of AIG's equity, and this is, as Geithner himself testified before the Senate Banking Committee in April 2008, not legal.

But the Trust's infirmities do not stop at its lack of independence. The Trust Agreement also assigns the beneficial interests to the U.S. Treasury as the Trust's beneficiary. This assignment is patently invalid because a trust beneficiary must be a person or entity that can own title to things in its own name. But the U.S. Treasury is -- by statute, by case law, and by actual fact -- nothing more than a bank account or depository for things owned by the U.S. government. And a bank account cannot own anything.

So how and why did the dozens, if not hundreds, of government and private-sector high-priced lawyers working on this transaction make such an elementary mistake? We don't know the answer to this question yet, but we do know why they could not name the Treasury Department as the beneficiary: because like with the FED, at the time, it did not yet have legal authority to acquire an ownership interest in any of the failing financial institutions, either. That authority would come later, when Congress passed the Emergency Economic Stabilization Act, which authorizes the use of TARP funds for acquiring equity. But even that legislation instructs the Treasury Department to avoid acquiring voting rights. Geithner's deal was all about acquiring not just voting rights, but super-majority control. Unfortunately, there was no legal authority at the time to do so.

The brute fact that now standing exposed before us is the use of an invalid Trust structure to conceal the unlawful ownership and control over 77.9% of AIG's equity and voting rights by the FED. If Geithner knew he was breaking the law, then this just happens to be the definition of criminal money-laundering under Title 18, Section 1956. Secretary Geithner has some explaining to do to AIG's public shareholders. We suggest that he seek legal advice first -- but this time, from lawyers who actually know what they are doing.

David Yerushalmi is a litigator specializing in securities law and public policy and serves as General Counsel to the Center for Security Policy, a Washington, D.C.-based think-tank specializing in national security. Mr. Yerushalmi is also representing the plaintiff in Murray v. Geithner et al. in a federal lawsuit challenging the U.S. government's takeover of AIG on First Amendment-Establishment Clause grounds.