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NY Fed sought to limit AIG bank disclosures
Source: Agencies |
January 8, 2010, Friday
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THE New York Federal Reserve Bank under Timothy Geithner urged insurer AIG in late 2008 to limit disclosures about its payments to banks after getting a US$180 billion government bailout, emails released yesterday showed.
The email exchanges, between the New York Fed and American International Group Inc lawyers, showed that AIG initially proposed disclosing to the US Securities and Exchange Commission in early December 2008 that it would pay counterparties 100 cents on the dollar to liquidate credit default swaps it sold them.
But the decision to pay Goldman Sachs, Societe Generale and other global banking giants in full with taxpayer funds was not disclosed by AIG until March 2009, when it announced a US$93 billion payoff that stoked public rage over the bailout.
Adding fuel to the fire, Geithner, who by then had become the US Treasury secretary, was forced to allow AIG to pay US$165 million in bonuses to top executives of the division that nearly caused its collapse.
Representative Darrell Issa, a California Republican who requested the emails from AIG and made them public, said they show that the New York Fed tried to suppress politically sensitive information about the bailout.
"It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information to the SEC," he said in a statement. "The American taxpayers, who own approximately 80 percent of AIG, deserve full and complete disclosure under our nation's securities laws, not the withholding of politically inconvenient information."
The emails showed that an explicit reference to counterparties receiving 100 percent of par value and other information on the transaction was crossed-out from a proposed SEC filing that was "marked up" by attorneys working for the New York Fed.
When the regulatory filing, disclosing a deal for the New York Fed's Maiden Lane III fund to take on an additional US$16 billion of AIG obligations, was finally made on Dec. 24, 2008, it made no reference to the counterparty payment rate.
Banks ultimately received US$27.1 billion in payments from Maiden Lane III to liquidate the credit default swaps -- part of the overall US$93 billion AIG payout that critics have labeled a stealth bailout of the institutions.
The New York Fed during Geithner's final weeks at the bank also has been chided for not negotiating hard enough for concessions from the banks. All but one bank refused to offer any discount on their holdings.
Geithner, who was nominated for Treasury secretary in November 2008, has faced a firestorm of criticism on his handling of AIG. He has said there was little leverage to negotiate and that "selectively defaulting" on the obligations could have had disastrous consequences for a financial system in crisis.
Republican Representative Roy Blunt of Missouri said the emails meant Geithner "has some explaining to do."
"Finding out that the leader now responsible for shepherding our economy through these troubled times encouraged bailout recipients to hide the ball is nothing short of stunning," he said in a statement.
Treasury spokeswoman Meg Reilly said the New York Fed loan at the heart of the transaction was on track to be paid back in full with interest. "Somehow the fact that the government's loan is 'above water' gets lost in all the consternation," she said.
SEC REQUESTS COUNTERPARTY DETAILS
The email traffic, which Issa requested from AIG in October, shows that attorneys for the New York Fed requested delays in AIG disclosures to the SEC and sought to delete references to "synthetic" collateralized debt obligations and the list of payments to counterparties.
"We believe that the agreements listed in the index (i.e., the Master Investment and Credit Agreement and the Shortfall Agreement) do not need to be filed," Peter Bazos, a Davis Polk & Wardwell lawyer representing the New York Fed, wrote to AIG attorneys on Nov. 25, 2008. "Please let us know your thoughts in this regard."
Six days after the Dec. 24 filing, the SEC said in a private letter to AIG's then chief executive, Edward Liddy, that the insurer should disclose listings of collateral postings for the swaps and name the bank counterparties that were paid. This led to the March disclosure.
An AIG spokeswoman declined to comment on the matter.
A Davis Polk spokesman could not immediately be reached for comment.
Thomas Baxter, the New York Fed's general counsel, said it was appropriate for the bank to weigh in on the disclosures, but the final decision rested with AIG and its lawyers.
"Our focus was on ensuring accuracy and protecting the taxpayers' interests during a time of severe economic distress," he said in a statement. "All information was in fact disclosed that was required to be disclosed by the company, showing that counterparties received par value," Baxter said. He did not say when the disclosures were made.
"There was no effort to mislead the public," Baxter said.
The email exchanges, between the New York Fed and American International Group Inc lawyers, showed that AIG initially proposed disclosing to the US Securities and Exchange Commission in early December 2008 that it would pay counterparties 100 cents on the dollar to liquidate credit default swaps it sold them.
But the decision to pay Goldman Sachs, Societe Generale and other global banking giants in full with taxpayer funds was not disclosed by AIG until March 2009, when it announced a US$93 billion payoff that stoked public rage over the bailout.
Adding fuel to the fire, Geithner, who by then had become the US Treasury secretary, was forced to allow AIG to pay US$165 million in bonuses to top executives of the division that nearly caused its collapse.
Representative Darrell Issa, a California Republican who requested the emails from AIG and made them public, said they show that the New York Fed tried to suppress politically sensitive information about the bailout.
"It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information to the SEC," he said in a statement. "The American taxpayers, who own approximately 80 percent of AIG, deserve full and complete disclosure under our nation's securities laws, not the withholding of politically inconvenient information."
The emails showed that an explicit reference to counterparties receiving 100 percent of par value and other information on the transaction was crossed-out from a proposed SEC filing that was "marked up" by attorneys working for the New York Fed.
When the regulatory filing, disclosing a deal for the New York Fed's Maiden Lane III fund to take on an additional US$16 billion of AIG obligations, was finally made on Dec. 24, 2008, it made no reference to the counterparty payment rate.
Banks ultimately received US$27.1 billion in payments from Maiden Lane III to liquidate the credit default swaps -- part of the overall US$93 billion AIG payout that critics have labeled a stealth bailout of the institutions.
The New York Fed during Geithner's final weeks at the bank also has been chided for not negotiating hard enough for concessions from the banks. All but one bank refused to offer any discount on their holdings.
Geithner, who was nominated for Treasury secretary in November 2008, has faced a firestorm of criticism on his handling of AIG. He has said there was little leverage to negotiate and that "selectively defaulting" on the obligations could have had disastrous consequences for a financial system in crisis.
Republican Representative Roy Blunt of Missouri said the emails meant Geithner "has some explaining to do."
"Finding out that the leader now responsible for shepherding our economy through these troubled times encouraged bailout recipients to hide the ball is nothing short of stunning," he said in a statement.
Treasury spokeswoman Meg Reilly said the New York Fed loan at the heart of the transaction was on track to be paid back in full with interest. "Somehow the fact that the government's loan is 'above water' gets lost in all the consternation," she said.
SEC REQUESTS COUNTERPARTY DETAILS
The email traffic, which Issa requested from AIG in October, shows that attorneys for the New York Fed requested delays in AIG disclosures to the SEC and sought to delete references to "synthetic" collateralized debt obligations and the list of payments to counterparties.
"We believe that the agreements listed in the index (i.e., the Master Investment and Credit Agreement and the Shortfall Agreement) do not need to be filed," Peter Bazos, a Davis Polk & Wardwell lawyer representing the New York Fed, wrote to AIG attorneys on Nov. 25, 2008. "Please let us know your thoughts in this regard."
Six days after the Dec. 24 filing, the SEC said in a private letter to AIG's then chief executive, Edward Liddy, that the insurer should disclose listings of collateral postings for the swaps and name the bank counterparties that were paid. This led to the March disclosure.
An AIG spokeswoman declined to comment on the matter.
A Davis Polk spokesman could not immediately be reached for comment.
Thomas Baxter, the New York Fed's general counsel, said it was appropriate for the bank to weigh in on the disclosures, but the final decision rested with AIG and its lawyers.
"Our focus was on ensuring accuracy and protecting the taxpayers' interests during a time of severe economic distress," he said in a statement. "All information was in fact disclosed that was required to be disclosed by the company, showing that counterparties received par value," Baxter said. He did not say when the disclosures were made.
"There was no effort to mislead the public," Baxter said.
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