For a year, we've wondered why AIG has been reluctant to disclose details related to the $62 billion in bailout money it funneled to banks in the midst of the financial crisis. Now we know: because the Federal Reserve Bank of New York was telling it to keep quiet. The disclosure has turned into a yet another problem for Treasury Secretary Timothy Geithner, who critics say is becoming as toxic to the Obama administration's handling of the financial crisis as the bad securities that caused it.
A cache of e-mails released Thursday by the office of Rep. Darrell Issa, a California Republican and ranking minority member of the House Committee on Oversight and Government Reform, paints a startling picture of how lawyers for the New York Fed directed AIG to withhold key details from the SEC about the billions in credit default swaps it had issued to some of the world's biggest banks, and its decision to make good on every penny of them, even as many of these banks were being bailed out themselves. At the request of Republican members of the oversight committee, its Democratic chairman, Rep. Edolphus Towns of New York, has announced that he will bring Geithner in front of the committee for a hearing later this month about the advice the New York Fed gave to AIG. If Geithner doesn't show, he could be subpoenaed. AIG has refused to comment on the matter.
The e-mails span five months beginning in November 2008, and chart how the New York Fed pushed AIG to delay filings and become less and less transparent in disclosing its counterparty agreements and in setting up the publicly funded holding company, Maiden Lane LLC III, that was created to buy up toxic securities it had insured. Throughout the chain of e-mails, lawyers from Davis Polk & Wardwell, representing the New York Fed, actually cross out language explaining that AIG paid its counterparty banks "100 percent of the par value" of the bad securities it had insured. It also appears that the New York Fed instructed AIG not to mention the nearly $10 billion of synthetic collateralized debt obligations that remained on its books. A synthetic CDO is a security whose underlying asset is not a bond, but an insurance contract on a bond. They are widely seen as some of worst of the toxic securities at the heart of the crash.
There are moments in the e-mails when lawyers for AIG push back, arguing for more disclosure, but in the end they acquiesce. The exchanges depict AIG as stuck in the middle of a tug of war between the SEC and New York Fed, with the SEC trying to pull the bailed-out insurance conglomerate toward transparency and the New York Fed trying to keep it in the dark. While there don't appear to be any claims that AIG or the New York Fed acted illegally, the e-mails do bring to the fore the lack of transparency that permeates the system. "It appears the New York Fed deliberately pressured AIG to restrict and delay important information to the SEC," Issa said in a statement. "The lack of transparency is disturbing enough, but the outstanding question that remains is why the Federal Reserve Bank of New York didn't fight for a better deal for the American taxpayer."
The e-mails could spell more trouble for Geithner, who has drawn criticism from lawmakers over the last year for his perceived coziness with Wall Street. During much of the back-and-forth e-mails in November and December 2008, Geithner was still president of the New York Fed. But the Treasury Department and the New York Fed insist that he had nothing to do with the discussions, that he had recused himself of the matter in anticipation of his nomination by President Obama. "Secretary Geithner played no role in these decisions and indeed, by Nov. 24, he was recused from work-ing on issues involving specific companies, including AIG," a Treasury spokesperson wrote in an e-mail to NEWSWEEK. The New York Fed followed shortly with a statement from its general counsel Thomas Baxter stating, "Matters of AIG securities law disclosure would not have been brought to the attention of the president of the Federal Reserve Bank of New York." Baxter has also been asked to attend the oversight-committee hearing, scheduled for the week of Jan. 18.
Critics say that, considering Geithner was at the time preparing to be appointed Treasury Secretary—a role in which he would undoubtedly have to deal with the swelling $182 billion AIG bailout—it's unlikely he was completely in the dark. And that if he had disavowed himself of all knowledge of the situation with AIG, how well was he really doing his job?
Sources at the New York Fed who spoke to NEWSWEEK on condition of anonymity because of the ongoing nature of the situation, said that the e-mails merely show what is a fairly routine back and forth discussion between a struggling financial company and its regulator, and that in the end all the details of AIG's bailout and counterparty payments were eventually made public. On March 15, under pressure from Congress, AIG did finally disclose the names of its counterparty banks. While much of the payments were made to European banks such as UBS, Deutsche Bank, and Société Générale, AIG did end up funneling significant bailout money to U.S. banks that had already been bailed out themselves under the Troubled Asset Relief Program. As AIG counterparties, Goldman Sachs got $12.9 billion, Bank of America got $5.2 billion, and Citigroup got $2.3 billion.
Issa, who first asked AIG for the e-mails on Oct. 30, received some 1,000 pages of documents at the end of December. Along with fellow Republicans Sen. Chuck Grassley and Rep. Roy Blunt, two of Congress's staunchest Geithner critics, Issa will likely point to the e-mails as evidence that the New York Fed was purposefully trying to hide information from the SEC. Even Barney Frank, the Democratic chairman of the House Financial Services Committee, has called the e-mails troubling and said that he supports congressional hearings to review them.
Sources at the Treasury and New York Fed played down the significance of the e-mails in interviews with NEWSWEEK and argue that the AIG bailout is going according to plan, and that taxpayers will eventually be paid back for their investment and could make a profit. As of Dec. 30, the loan balance of the Maiden Lane III portfolio, the holding com-pany created to buy up securities that AIG had insured, had fallen to $18.6 billion from $23.5 billion in September. "In short, more than 25 percent of the Fed's original loan has already been repaid," a Treasury spokesperson wrote to NEWSWEEK in an e-mail Thursday night. "And the value of Maiden Lane III's assets is worth more than 120 percent of the remaining balance so the government is above water." It also appears it's been operating below the surface.