The Office of the Special Inspector General for the Troubled Asset Relief Program released a report yesterday on last year’s government bailout of the insurance giant AIG. Timothy Geithner headed the Federal Reserve Bank of New York at the time, and he failed miserably.

From the Huffington Post:

Instead of bargaining with AIG’s numerous counterparties to resolve its billions of dollars in souring derivatives contracts, Geithner’s team ended up paying top dollar for toxic assets — “an amount far above their market value at the time,” the report notes.

“There is no question that the effect of FRBNY’s decisions — indeed, the very design of the federal assistance to AIG — was that tens of billions of dollars of Government money was funneled inexorably and directly to AIG’s counterparties,” the Office of the Special Inspector General for the Troubled Asset Relief Program said.

Wall Street firms like Goldman Sachs, Merrill Lynch and Wachovia got full value for their derivatives contracts with AIG, and taxpayers got the bill. In total, $27.1 billion of public money was transferred to companies that did business with AIG.

Throughout the bailout of AIG, the report says, the New York Fed failed to develop appropriate contingency plans; failed to properly assess the impact of its decisions; and generally engaged in negotiation strategies that were doomed to fail.

Then, after Geithner’s team paid off AIG’s counterparties on Wall Street, it imposed “onerous” terms on the troubled insurer, the report says.

Some analysts think this report was if anything too kind:

That Turbo Timmy [Geithner] and the Fed were “played” is the most charitable interpretation possible of this sorry turn of events. This was criminal. It may merely have been criminally incompetent, but this needs to be treated as a very serious lapse. Yes, I’m sure a very high percent of the CDS [credit default swap] contracts needed to be paid out to prevent Very Bad Stuff from happening, but that should have been bifurcated, with the percentage that reflected fair payout as the CDS compensation, the balance as an equity infusion.

Who was the Fed representing? Here we get into the usual debate of was the Fed operating as a government entity (as it likes to pretend when convenient, which is most of the time) or a private bank favoring entity? It most certainly appears to have behaved like the latter. It acted only from the vantage of what was best for the financiers, and gave nary a thought as to whether that might conflict with the interests of other constituencies.

I’ve long felt that appointing Treasury Secretary Timothy Geithner was one of Barack Obama’s biggest mistakes as president. Geithner was a key architect of last year’s bailout policies, which haven’t freed up credit for small business but have led to record profits for some Wall Street firms. Geithner did not protect the public interest during the AIG bailout. He has put financial industry insiders in many key government positions while ignoring Congressional requests to disclose how bailout funds have been spent.

Obama should send Geithner packing, along with presidential adviser Larry Summers, and appoint an economic team that’s not so wrapped up in Wall Street culture.

Unfortunately, it looks like the administration will try to change the subject instead of cleaning house:

A senior administration official tells POLITICO: “We will be announcing a sustained, multilevel attack on financial fraud — from executives who illegally profited on Wall Street to the bad actors still targeting middle class families with mortgage fraud schemes. This effort will bring to bear resources from across the government to both punish those whose actions helped cause the economic downturn and to prevent future financial meltdowns by showing would-be criminals the consequences of breaking the law. This is a high-level commitment by the administration to do everything possible to address financial fraud.

Good luck with that while the man who facilitated last year’s biggest ripoffs is still in charge of Treasury.

UPDATE: File this under G for “great ideas that will never happen”: replace Geithner with Robert Reich, who was labor secretary in Bill Clinton’s cabinet.

LATE UPDATE: William K. Black asks a good question: “Why is Obama Championing Bush’s Financial Wrecking Crew?” Worth a read.