New York Fed: Further Investigation Regarding the AIG Affair

Includes: AIG, GS
by: John Lounsbury

Neil Barofsky, the special inspector general for the TARP (Troubled Assets Relief Program), has announced that he is conducting an investigation of the New York Fed. According to an article by Tom Braithwaite in The Financial Times, Barofsky wants to know if the Fed withheld information from his office and from the Securities and Exchange Commission regarding the transfer of government funds through AIG to a number of banks at the height of the financial crisis in late 2008.

Two major beneficiaries of the action were Goldman Sachs (NYSE:GS) and France’s Société Générale, although several other banks also received payments.

On January 12, Edolphus Towns, the Chairman of the House oversight committee, announced he would subpoena the New York Fed for records regarding the arrangements with AIG. Mr. Towns said:

To help the Committee’s investigation of payments made by AIG to its counterparties, I am issuing a subpoena today to the Federal Reserve Bank of New York. This subpoena will provide the Committee with documents that will shed light on how and why taxpayer dollars were used for a backdoor bailout.

The arrangements for the New York Fed funneling government funds through AIG to satisfy CDS (Credit Default Swaps) arrangements that AIG owed to a number of banks was described in a detailed report from Barofsky’s office in November. The presumed justification was that not to have made such arrangements would have finalized the bankruptcy of AIG and possibly have had a serious negative effect on some of the banks. The essence of the complaint was that it was done in the absence of transparency. The implication is that if the action had been known in advance congressional action might have stopped it. In the opinion of this writer, that is debatable.

The Barofsky probe goes to the further point of whether or not the initial transparency was the followed by a cover up of the record.

Additional information has come to light since the November report, which led to the Towns announcement on January 12. On January 8, Tom Braithwaite wrote another article in The Financial Times reporting on the activities of Darrell Issa, the senior Republican on the House oversight committee. Braithwaite wrote (referring to Mr. Issa):

He obtained e-mails showing the New York Fed pushing the insurance group to delay releasing information related to the payments and restrict the degree of detail provided to the Securities and Exchange Commission. Pressure from the SEC and Congress prompted AIG to file more details later.

There have been reports (not verified by the author) that the Treasury is maintaining that Secretary Timothy Geithner, who was Chairman of the New York Fed at the time, was not involved in the e-mails or the direct interactions between AIG and the banks. According to the latest Braithwaite article:

Mr Geithner has defended the initial decision that enabled holders of securities insured by AIG-issued credit default swaps to receive 100 cents on the dollar. The Treasury and New York Fed have said he recused himself from subsequent decisions over the disclosure of documents as he prepared to join the Obama administration.

Maybe before that he was doing his taxes?

Disclosure: No positions.