An arm of the Federal Reserve, then led by now-Treasury Secretary
Timothy Geithner, told bailed-out insurance giant AIG to withhold key
details from the public about overpayments that put billions of extra
tax dollars in the coffers of major Wall Street firms, most notably
The sordid tale unfolds in a series of e-mails between the company
and the New York Fed obtained by Rep. Darrell Issa (R-CA), the ranking
member of the House Committee on Oversight and Government Reform, and
first publicly disclosed by Bloomberg News.
Taxpayers have committed about $182 billion to AIG. The
under-regulated firm developed and sold complicated derivatives
products without having adequate capital in place if those bets went
bad, which they eventually did. The firm nearly single-handedly wrecked
the entire financial system.
After the firm was given a taxpayer-funded backstop, one of its most
controversial acts was to repay banks at 100 cents on the dollar for
what was by that point nearly worthless insurance the banks had bought
from AIG, known as credit-default swaps.
A brutal report issued in November
by a government watchdog disclosed that AIG had actually been trying to
negotiate better terms with the banks until - guess what? -- the New
York Fed stepped in. The report held Geithner personally responsible,
and led to renewed questions about his fitness for the job.
Now it turns out Geithner's people told AIG to delete references on
draft regulatory filings to the sweetheart deals. And AIG then excluded
any mention of them in its December 2008 filing with the Securities and
Exchange Commission, keeping the information hidden from investors and
"It appears that the New York Fed deliberately pressured AIG to
restrict and delay the disclosure of important information to the SEC,"
Issa said in a statement. "The American taxpayers, who own
approximately 80% of AIG, deserve full and complete disclosure under
our nation's securities laws, not the withholding of politically
"This news ought to serve as a cautionary tale to those who advocate
giving the Federal Reserve even more power over the U.S. economy. The
lack of transparency and accountability is disturbing enough, but the
outstanding question that remains is why the [New York Fed] didn't
fight for a better deal for the American taxpayer. Clearly, the New
York Fed wanted to suppress details and limit disclosure of the
counterparty deal from the American people -- the only question is why?"
Wall Street firms like Goldman Sachs, Merrill Lynch and Wachovia got
full value for their derivatives contracts with AIG, and taxpayers got
stuck with the bill. In total, $27.1 billion of public money was
transferred to companies that did business with AIG. It was largely
seen as a "backdoor bailout" for firms like Goldman.
Instead of bargaining with AIG's numerous counterparties to resolve
its billions of dollars in souring derivatives contracts, Geithner's
team ended up having AIG pay top dollar for toxic assets -- "an amount
far above their market value at the time," the November report noted.
It described how the team led by Geithner failed nearly every step of
And consider the timing of the newly discovered action. Reports
first emerged that Geithner was being tapped for the Treasury secretary
post on Nov. 21, 2008; the Senate confirmed his nomination on Jan. 26.
Details of AIG's 100-cents-on-the-dollar payments to various banks with
taxpayer-supported funds totaling in the billions, which would
otherwise have become public no later than December, weren't disclosed
to the public until March, when Geithner was already in office.
The Treasury's response this morning is, essentially, no harm no
foul. Meg Reilly, a Treasury spokeswoman, released a statement: "In the
transaction at the heart of this dispute... the FRBNY made a loan of
$25 billion which is on track to be paid back in full with interest so
that taxpayers will be made whole. Somehow that fact that the
government's loan is 'above water' gets lost in all the consternation
despite its mention on page 2 of the SIG-TARP report (and weekly updates on the FRBNY's web site