The Federal Reserve Bank of New York, while headed by current Treasury Secretary Timothy Geithner, pressured American International Group Inc. (NYSE: AIG) to withhold information about payments it made to banks during the peak of the financial crisis, according to a report by Bloomberg News yesterday (Thursday).
A series of emails between the Federal bank and AIG lawyers show that the insurer was told to delete details from public disclosures about payments it made on credit default swaps to such banks as Goldman Sachs Group Inc. (NYSE: GS) and Deutsche Bank AG (NYSE: DB), which were settled for 100 cents on the dollar.
The swap payments, which totaled $62 billion and have been characterized as "back door bailouts" by some lawmakers, are at the center of allegations that Geithner failed to negotiate a better deal for taxpayers.
The most prominent critic of the deals, which were revealed in full only after Geithner was confirmed, has been Neil Barofsky, the special inspector in charge of policing the Troubled Asset Relief Program (TARP).
"Federal Reserve officials provided AIG's counterparties with tens of billions of dollars they likely would have not otherwise received," Barofsky wrote in a Nov. 17 report. "The default position, whenever government funds are deployed in a crisis to support markets or institutions, should be that the public is entitled to know what is being done with government funds."
The e-mails revealed that AIG's attorneys included references to paying full value for the swaps in a draft regulatory filing. But after reviewing the draft, the Fed told AIG to cross out those references.
During a congressional hearing last year, a New York Fed official said that releasing such information at the height of the financial crisis would have compromised AIG's ability to operate. AIG eventually excluded the language when the filing was made public on Dec. 24, 2008.
The e-mails were obtained by Representative Darrell Issa, R-CA, ranking member of the House Oversight and Government Reform Committee. Issa obtained the emails from AIG after Bloomberg reported in October that the New York Fed ordered the beleaguered insurer not to negotiate for discounts in settling the swaps.
"It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information," Issa told Bloomberg. Taxpayers "deserve full and complete disclosure under our nation's securities laws, not the withholding of politically inconvenient information."
The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the contracts linked to subprime home loans threatened to overwhelm the insurer just weeks after its taxpayer-funded rescue.
The New York Fed issued AIG its first bailout of an $85 billion credit line in September 2008. The bailout eventually grew to $182.3 billion after being expanded three times with another $60 billion Fed credit line, a $69.8 billion credit facility from the Treasury and up to $52.5 billion to buy mortgage-linked assets owned or backed by the company. The New York Fed has stated it believes it will recoup at least part of the loans.
The Fed's order to AIG to purchase the securities at par, or full value, instead of at current market prices, cost taxpayers as much as $30 billion, about $20 billion of which was paid to foreign banks, The New York Times reported.
At the top of the list was Société Générale SA (ADR OTC: SCGLY). AIG purchased swaps worth only $8.4 billion from the French bank for almost twice their value of $16.4 billion -- an $8 billion windfall, courtesy of U.S. taxpayers. Next in line was Goldman Sachs, which was paid $14 billion for securities that had a market value of $8 billion.
Deutsche Bank got $4.9 billion above market value for its securities, while Calyon and UBS AG (NYSE: UBS) raked in an extra $1.9 billion and $1.8 billion, respectively.
Without AIG as a guarantor or other hedging mechanisms, those financial institutions would have most likely had to charge-off those securities as losses on their books.
News & Related Story Links:
- Bloomberg:
Geithner's New York Fed Told AIG to Limit Swaps Disclosure - Bloomberg:
Congressman Demands AIG ‘Backdoor Bailout' Documents - SIGTARP:
Factors Affecting Efforts to Limit Payments to AIG Counterparties - New York Times:
Adding Up A.I.G.'s Backdoor Bailouts - Money Morning:
Is Timothy Geithner A Roadblock to Regulatory Reform? - Money Morning:
Geithner and Summers Protect Free Market Mantle Against Regulatory Reform - Money Morning:
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