Here are a couple of unrelated stories, one on Harry Markopolos, the man who on 4 occasions tried to convince the SEC of Bernie Madoff's Ponzi scheme, the second on how Geithner used a fictitious "Trust" to accomplish an illegal takeover of AIG.



Inuring minds are reading a post on the Sense on ¢ents blog by Larry Doyle called Harry Markopolos: “Don’t Trust Your Government”

In an interview on the Today show this morning (video clip after the fold), Harry Markopolos dropped a few bombshells. Harry’s statement that he had purchased a gun and mentally prepared himself to kill Bernie Madoff in self-defense if need be will likely grab the most attention. It shouldn’t.



Markopolos’ biggest bombshell this morning is his warning to America, “don’t trust your government.” No surprise that Today host Matt Lauer did not probe deeper. I am not confident that other outlets will delve deeper into Harry’s statement, either. I wonder why Harry himself is reticent to specifically point out the individuals and the instances which lead him to make that statement.



Recall that a year ago Harry defined the SEC as merely incompetent while simultaneously defining FINRA (Financial Industry Regulatory Authority) as ‘in bed with the industry’ that is Wall Street. Well, it does not take an advanced degree to connect Harry’s grenade toss into FINRA’s backyard a year ago with his volley this morning.



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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 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.



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.



Time To Indict Geithner

April 24, 2009

June 26, 2009

July 17, 2009

October 20, 2009

January 07, 2010

January 26, 2010

January 28, 2010

January 31, 2010