Fed delayed disclosure of controversial AIG payout

McClatchy NewspapersJanuary 7, 2010 

WASHINGTON — In the weeks before Timothy Geithner's confirmation as treasury secretary, his underlings at the Federal Reserve Bank of New York directed American International Group (AIG) to delay publicly disclosing that tax dollars were used to pay in full $62 billion in insurance-like bets it owed to major U.S. and foreign banks.

The New York Fed's efforts to delay disclosure of its payment terms coincided with the nomination of Geithner, its president, and with his two-month campaign for Senate confirmation. It's not clear, however, whether a desire to protect Geithner or other reasons related to the nation's financial crisis, which was roiling at the time, drove the push for secrecy.

However, the lack of disclosure spared Geithner from having to defend the Fed's actions during confirmation hearings that already were clouded by his underpayment of federal income taxes.

Emails between the Fed and AIG made public Thursday reveal a months-long disagreement over how much the public should be told about what ultimately became a back-door bailout of AIG by taxpayers.

One series of emails describes how a lawyer for the Fed scratched out language from a regulatory filing prepared by AIG saying it had paid "100 percent of the par value" to satisfy the exotic bets, called credit-default swaps.

The payments, including $13.9 billion to Wall Street behemoth Goldman Sachs, have been a flashpoint for controversy. A special inspector general tracking the use of bailout money recently criticized the New York Fed for overriding AIG's attempts to settle the swaps for lesser sums.

The lack of disclosure came over the objections of lawyers and officials from AIG and from the Securities and Exchange Commission after the insurer made a sketchy regulatory filing.

A Treasury Department spokeswoman, Meg Reilly, said that Geithner formally withdrew from participating in matters affecting AIG and major banks as soon as he was nominated on Nov. 24, 2008.

"Secretary Geithner played no role in these decisions," she said.

The first email resisting disclosure by Brett Phillips, an attorney in the New York Fed's general counsel's office, was sent hours after President Barack Obama announced Geithner's nomination to the cabinet post.

California Rep. Darrell Issa, the ranking Republican on the House Oversight and Government Reform Committee who obtained the emails, told McClatchy that the New York Fed's insistence on secrecy about the payments suggests that Geithner "was protecting his friends and protecting his nomination."

"If he has to answer the question, was he a good steward of the taxpayers' dollars, this would say no," Issa said. Geithner's response to questions about the need to pay 100 cents, he said, "at minimum would have been open to disagreement by many of the members of the Senate who voted for his confirmation."

Geithner won Senate confirmation on Jan. 27, 2009 by a vote of 60-34.

Treasury spokeswoman Reilly dismissed the email exchanges as insignificant, asserting that $25 billion in taxpayer funds used to buy securities underlying the AIG swap contracts are "on track to be paid back in full with interest."

She declined to elaborate on the remaining $37.1 billion paid to settle the swap contracts.

AIG issued much of the protection to cover major U.S. and European banks in the event that a sharp downturn in the U.S. housing market depressed the value of securities sold offshore. When a rash of loan defaults by marginally qualified subprime borrowers started a downhill slide in housing prices, AIG was swamped with demands for partial payment on its deteriorating portfolio of swap contracts, leading to a $182 billion federal bailout.

McClatchy Newspapers revealed in April 2009 that as part of the bailout, the New York Fed had opted to pay the full value of all of the mortgage-related swap contracts after European banks declined to accept discounted payments. Bloomberg News first reported the e-mails Thursday.

The e-mails show that AIG officials considered the swap settlements to be major events under securities laws requiring public disclosures.

On Nov. 25, 2008, AIG's Kathleen Shannon advised the Fed and its outside counsel that AIG attorneys and its law firm, Sullivan & Cromwell, "believe that the better practice and better disclosure in this complex area is to file the agreements currently rather than to delay."

The debate persisted until AIG officials relented.

On Dec. 30, 2008, after AIG listed the $62 billion figure in an SEC filing but included no details, the SEC sent a letter to the insurer's chairman and chief executive officer, Edward Liddy, requesting a revised disclosure. Even then, Fed officials persisted, arranging conference calls with SEC officials to argue for a disclosure delay.

In March, 2009, AIG finally disclosed its payments, naming each bank and the amount of money each received.

Asked whether its insistence on secrecy bore any connection to Geithner's nomination, a spokesman for the New York Fed declined comment Thursday.

Issa said that it appears that the Fed officials "deliberately pressured AIG to restrict and delay the disclosure of important information to the SEC," and that taxpayers deserve full disclosure, "not the withholding politically inconvenient information."

Sylvain Raynes, a New York expert in structured securities of the kinds subject to the swap contracts, called it "very odd" that "the government actually worked against its own interests by paying right away" on contracts that didn't expire for years.

It would have been more advantageous, he said, for Fed officials to say, "We're going to wait for the deals to work themselves out according to their terms" and demand proof of every default.

"They could have lasted years and years like this."

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