The Financial 'Black Box': What's Still Hidden In AIG's Files?
As federal hearings into the cause of the financial crisis got
underway this week, attention has focused on one key outstanding
question: Whether the giant insurer American International Group
committed fraud in the run-up to its $182 billion bailout.
The records of AIG's actions presumably are contained in company documents and e-mails. Some of those records have been obtained and published by news organizations
and congressional investigators. But some lawmakers and former
financial prosecutors argue that most details remain unknown and should
be made public--an idea resisted so far by congressional Democrats and
The little the public knows about AIG's bailout pertains to the company's use of $25 billion in government money to buy back toxic securities from Wall Street's big banks.
Last week, Rep. Darrell Issa (R-Calif.), ranking member of the Committee on House Oversight and Government Reform, released e-mails showing that
the Federal Reserve Bank of New York, AIG's regulator, kept details of
these payouts secret while now-Treasury Secretary Timothy Geithner was
in charge of the New York Fed. The Financial Crisis Inquiry Commission scrutinized the payouts--specifically to Goldman Sachs-- at a hearing Wednesday. Then Rep. Ed Towns (D-N.Y.), chairman of the oversight committee, subpoenaed the New York Fed this week for all documents related to the payouts, including Geithner's e-mail and phone logs.
AIG was a pioneer and the world's top player
in the trade of credit default swaps - exotic instruments blamed for
fueling the cascade of financial disasters in 2007 and 2008. The
company ultimately received four separate federal bailouts and, unlike
big banks, is unlikely to pay it all back to taxpayers.
AIG's financial products division, which handled the swaps, is a
"black box, the epicenter" of the financial crisis, former New York
Governor Eliot Spitzer said in an interview. Given that taxpayers own
nearly 80 percent of the company, Spitzer said, the public is entitled
to see a decade's worth of AIG's e-mail, internal accounting documents
and financial models. This information will help prosecutors determine
whether AIG employees broke the law, he said.
"It's the best use of our money," said Spitzer, who as New York's
attorney general was known as the Sheriff of Wall Street for
prosecuting financial titans. Spitzer leveraged his performance as
attorney general into the governor's mansion before resigning in a
prostitution scandal in 2008.
Spitzer's call for AIG records has gained traction among some congressional Republicans.
Issa, according to a spokesman, would support expanding the
subpoena. "In our pursuit to fully understand what risks led to the
financial meltdown, we should access and release as much information as
we possibly can," said the spokesman, Kurt Bardella.
But Issa lacks the power to issue subpoenas. And those who can
compel AIG to turn over the documents are so far balking at the idea.
Towns' staff, for instance, has said the congressman is limiting his
investigation to AIG's payments to banks. This inquiry likely will
produce documents from the last year or two.
"The subpoena Chairman Towns will issue to the Federal Reserve Board
of New York is a responsible and targeted effort to uncover important
facts about important issues," said Jenny Thalheimer Rosenberg,
communications director for Towns' committee.
If Congress won't act, Spitzer said, the AIG Credit Facility Trust
should. The New York Fed created the Trust last year to hold and
oversee the taxpayers' investment in the company. Although the Trust's
three members are not allowed to interfere in the day-to-day affairs of
the company, they have authority to oust AIG's current board. If the
trustees wanted, Spitzer said, this implicit threat could compel the
board to release the documents.
The trustees "have the opportunity to be among the most effective
and influential investor advocates in history," Spitzer and two other
experienced fraud investigators said in a recent op-ed article in the New York Times.
"Before A.I.G. escapes, they should demand the evidence," wrote
Spitzer; Frank Partnoy, a former investment banker; and William K.
Black, a former banking regulator who led investigations of fraud
during the savings-and-loan scandal.
But the Investigative Fund found that the trustees, who each receive
an annual $100,000 salary, are steering clear of the controversy. "The
trustees have no comment regarding the suggestion that AIG's board
release the e-mails of the company, nor will they comment on any views
they might have on that issue," Peter Bakstansky, the Trust's adviser,
said in an e-mail.
Although the New York Fed says the trustees are independent, each is either a current or former Federal Reserve official.
One trustee, Jill M. Considine, chairs a firm that administers hedge
fund portfolios and is a former board member of the New York Fed.
Another trustee, Chester B. Feldberg, was an employee of the New York
Fed for 36 years. Douglas L. Foshee, chief executive of the El Paso
Corporation and former chief operating officer of Halliburton, is the
current board chair of the Federal Reserve Bank of Dallas' Houston
Without the trust's cooperation, another potential route for
obtaining AIG's documents is the Financial Crisis Inquiry Commission.
When Congress created the bipartisan commission, lawmakers gave it
A spokeswoman was unsure whether the commission planned to apply its subpoena power to AIG.
But at the commission's first hearing on Wednesday, its chairman,
Phil Angelidies, probed AIG's government-subsidized payments to Goldman
Sachs and other big banks.
Goldman was one of several banks that bought AIG's credit default
swaps, which insured the banks against losses on their risky
mortgage-backed investments. When the investments collapsed, AIG owed
billions to Goldman, Bank of America and Citigroup, among others.
Instead of honoring the insurance agreements, AIG used $24 billion in
taxpayer funds to buy the mortgage investments from the banks at 100
cents on the dollar.
But many of the investments were worth substantially less than their
face value, according to a report last year by the special inspector
general for the bailout.
At the hearing, Angelides asked Lloyd Blankfein, Goldman's chair and
chief executive officer, whether government regulators ever asked him
personally to accept a discount from AIG.
Blankfein's answer: "Never."