U.S. lawmakers force issue on Fed role in AIG bailout

By Reuters Staff
January 12, 2010

By Glenn Somerville

WASHINGTON, Jan 12 (Reuters) – U.S. lawmakers moved on Tuesday to force release of documents that may show whether the New York Federal Reserve pressured insurer AIG to limit discussions about payments to banks when current Treasury Secretary Geithner led the New York Fed.

The Democrat who heads the House of Representatives Oversight Committee, Rep. Edolphus Towns of New York, issued the subpoena to the New York Fed saying it “will provide the committee with documents that will shed light on how and why taxpayer dollars were used for a backdoor bailout.”

Congressional ire was fanned by the refusal of the inspector general for the government’s bailout fund, the Troubled Asset relief Program or TARP, to release material on AIG’s payments to banks because the Federal Reserve asked them not to make them available to the public.

“Just when you think that these outrageous abuses of taxpayers’ trust can’t get any worse, they do,” Republican Rep. Roy Blunt of Missouri said, adding “Secretary Geithner’s New York Fed deliberately counseled AIG to muddy the waters and sit on information the taxpayers deserved to know relating to the disbursement of billions of dollars in bailout funds.”

Geithner headed the New York Fed until being nominated in late 2008 by President Obama to become Treasury Secretary. Lawmakers are waiting for Treasury to say whether Geithner will testify on the AIG issue next week.

Separately on Tuesday, Republican Senator Jim Bunning of Kentucky, a member of the Senate Banking Committee, said an email exchange released last Thursday showing the New York Fed advised American International Group Inc to withhold information about derivatives counterparties from its Securities and Exchange Commission (SEC) filings raised serious issues.

“Because the information withheld appears to be material information about the financial condition of AIG and the value of the company, these actions may constitute a serious violation of the securities laws,” Bunning said in a letter to SEC Chairman Mary Schapiro.

The SEC declined to comment.

Bunning said the regional Fed bank’s actions “are likely to have caused and continue to cause losses to private investors and undermine the credibility of the U.S. financial and securities markets.”

The email exchange continues to stir controversy, especially in an atmosphere of public anger about the fact big banks that got taxpayer-supplied bailouts are getting ready to award their executives with big bonuses.

Many banks have paid back their bailout money but that has not appeased taxpayers who still face tight credit and a weak economy while bankers award themselves bonuses.

The emails show AIG initially proposed disclosing to the SEC in early December 2008 that it would pay counterparties 100 cents on the dollar to liquidate credit default swaps it sold them.

AIG received a $180 billion bailout from the government.

Its decision to pay Goldman Sachs Group Inc <GS.N>, Societe Generale AG <SOGN.PA> and other global banking firms in full with taxpayer funds was not disclosed by AIG until March 2009.

At the time, it was revealed that a total of about $62 billion had been paid to banks to settle derivatives contracts, a sum that helped stoke public rage over the government’s bailout of the insurer.

The email exchange between lawyers for the New York Fed and AIG made public earlier this month implied that the regional Fed bank pressured AIG to limit disclosure about the payments.

Geithner was president of the New York Fed last year but had become the U.S. Treasury secretary by March 2009 and he allowed AIG to pay $165 million in bonuses to top executives of the division that nearly caused its collapse.

The Obama administration and the New York Fed have said Geithner was unaware of any emailed advice by Fed lawyers to limit disclosures, but U.S. lawmakers are pressing for Geithner to testify at a hearing next week.

Bunning, a sharp-spoken critic of many Fed and Treasury policies, is the ranking Republican on the Securities, Insurance and Investment Subcommittee. He urged Schapiro to investigate “actions taken by employees and agents of the Federal Reserve Bank of New York and government officials” with respect to AIG.

(additional reporting by Mark Felsenthal and David Lawder)

(Reporting by Glenn Somerville; editing by Andrew Hay)

((glenn.somerville@thomsonreuters.com; +1-202-898-8377; Reuters Messaging: glenn.somerville.reuters.com@reuters.net))

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