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New York Fed Faces House Subpoena Over AIG Bailout

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Jaunary 12, 2010
By Hugh Son

(Bloomberg) — The Federal Reserve Bank of New York may be compelled to hand over documents related to American International Group Inc.’s government bailout after the chairman of a House oversight committee said he will issue a subpoena.

Edolphus Towns, the New York Democrat who runs the Oversight and Government Reform Committee, said in a statement that he will issue a subpoena today to get New York Fed records concerning the decision it made to fully reimburse AIG’s partners. Banks including Goldman Sachs Group Inc. and Societe Generale SA were among beneficiaries of AIG’s rescue, called by lawmakers a “backdoor bailout” for financial firms.

The New York Fed, run by Timothy Geithner when AIG was rescued, had resisted since November calls to provide documents without a subpoena, Darrell Issa of California, the ranking Republican on the oversight committee, said today in a letter. The New York Fed asked AIG to withhold and delay the disclosure of information about the bank payments to the public, according to e-mails provided by Issa to Bloomberg News last week.

“This subpoena will provide the committee with documents that will shed light on how and why taxpayer dollars were used for a backdoor bailout,” Towns said in his statement. Jack Gutt, a spokesman for the New York Fed, didn’t immediately return a call seeking comment.

Geithner, now the head of the Treasury Department, was asked by the oversight committee last week to testify in public hearings about what he knew of the New York Fed’s efforts to limit disclosure of the payments. Thomas Baxter, general counsel of the New York Fed, said last week that Geithner wasn’t aware of the issue because the lawyer didn’t think it merited Geithner’s attention.

Geithner Recused

Meg Reilly, a spokeswoman for the Treasury Department, declined to comment on whether Geithner would testify. She said last week that while at the New York Fed, Geithner “was recused from working on issues involving specific companies, including AIG,” after he was nominated for the secretary post on Nov. 24, 2008. The e-mail correspondence between the New York Fed and AIG released last week begins on Nov. 24, 2008.

While AIG “has been cooperative” and provided correspondence between the insurer and the New York Fed, the regulator had refused to provide confidential documents, Issa said.

“Consistent with the New York Fed’s past practices, in the absence of a subpoena, we have included only public documents in our production,” current President William Dudley said in a Nov. 17 letter, according to Issa.

Barofsky’s Audit

The New York Fed directed Neil Barofsky, the government’s lead bailout watchdog, to withhold confidential documents from Issa as well, according to a letter provided by the California Republican. Barofsky wrote in the letter today that his office obtained the documents as part of a November audit of the U.S. rescue of New York-based AIG. Issa had asked Barofsky to provide data from his audit for the House investigation.

“The Federal Reserve has directed us not to provide you with the documents that it has provided to us,” wrote Barofsky, the special inspector of the U.S. Troubled Asset Relief Program. “We regret the Federal Reserve’s position in this matter.”

Geithner made the decision to pay banks 100 cents on the dollar for their AIG swaps tied to subprime mortgages even though the underlying assets had declined in value, according to Barofsky’s audit.

AIG proposed to disclose that it fully reimbursed banks to retire the contracts in December 2008. The New York Fed crossed out the reference in a draft of a regulatory filing, according to the e-mails, and AIG excluded the language when the filing was made public Dec. 24, 2008.

Pressured to Disclose

The insurer was pressured by lawmakers and the Securities and Exchange Commission to disclose more details and in March released a statement listing banks and the sum of the payments they received. An AIG filing in May listed individual transactions and identified some of the securities tied to the swaps.

“Our focus was on ensuring accuracy and protecting the taxpayers’ interests during a time of severe economic distress,” Baxter said last week in a statement. “All information was in fact disclosed that was required to be disclosed by the company, showing that counterparties received par value. There was no effort to mislead the public.”

AIG’s first rescue was an $85 billion credit line from the New York Fed in September 2008. The bailout was expanded three times and is now valued at $182.3 billion. That includes a $60 billion Fed credit line, an investment of as much as $69.8 billion from the Treasury and up to $52.5 billion to buy mortgage-linked assets owned or backed by the company.

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