Fed wants to keep AIG secrets
A top official tells Congress he opposes unmasking the Wall Street firms that have pocketed tens of billions of dollars in taxpayer bailout funds.
NEW YORK (Fortune) -- Officials shouldn't reveal which Wall Street firms pocketed billions of dollars in the government's bailout of AIG, a top Federal Reserve official said.
Firms that did business with the troubled insurer did so "expecting confidentiality," Fed Vice Chairman Donald Kohn told the Senate Banking Committee in testimony Thursday.
He said publishing a list of the firms that benefited from government support of AIG -- as lawmakers have been demanding -- could undermine trust in the markets and increase financial instability.
"I would be very concerned if we started revealing lists of names of companies that did transactions" with AIG or with the government on AIG's behalf, Kohn said in response to questions. Doing so, Kohn added, could "undermine confidence" in the financial system.
The comment was met with incredulity by senators who said the government must do a better job explaining how its actions over the past six months have benefited all Americans, and not simply troubled big companies and their trading partners. AIG has received more than $150 billion in federal aid since its brush with bankruptcy last fall.
"Public confidence in what we're doing is at stake, and the public right now is deeply deeply troubled," said committee chairman Chris Dodd, D-Conn. "I understand the legal arguments you've given me, but that kind of answer undermines public trust."
Kohn's remarks also run counter to the oft-stated preference by Fed chief Ben Bernanke and other top officials for more "transparency" in the government's dealings in the financial crisis.
Kohn and two other top regulators -- Scott Polakoff, acting director of AIG regulator the Office of Thrift Supervision, and Eric Dinallo, New York's top insurance supervisor -- appeared at the hearing, which examined what went wrong at the big insurer.
The hearing comes just days after the latest round of federal support for AIG. and one day after Congress' Joint Economic Committee chairman demanded that the Fed name the trading partners that benefited directly from the federal aid showered on AIG.
Rep. Carolyn Maloney, D-N.Y., sent a letter to Bernanke Wednesday requesting information about transactions last November in which the Federal Reserve Bank of New York agreed to lend $52.5 billion to two newly formed companies for the purpose of purchasing troubled debt linked to AIG.
One of those companies got $30 billion from the New York Fed for the purpose of buying so-called collateralized debt obligations, the bundles of risky debt sold on Wall Street. AIG had promised to make the CDO owners whole in case of any losses via the sale of credit default swaps.
The government agreed to buy the CDOs in hopes of unwinding the swaps, which became a massive cash drain at AIG after its credit ratings were downgraded last fall.
Kohn said Thursday that the Fed and other government agencies acted because "we believe we had no choice if we are to pursue our responsibility for protecting financial stability." He said the beneficiaries of federal support of AIG included "pension funds, households, businesses and people with 401(k)s" - not just big firms on Wall Street.
But Dodd and other senators questioned the decision to pay those trading partners in full for assets that were valued at deeply distressed prices.
Sen. Bob Corker, R-Tenn., asked why policymakers didn't simply guarantee that the government would stand behind AIG's obligations, without producing any upfront cash.
Kohn insisted that the Fed didn't have the authority to do so, a claim Corker said he found "simply incredible."
While Kohn stressed that the Fed paid what he described as market prices, AIG's counterparties got to keep the collateral they held on the trades. Big firms including Goldman Sachs (GS, Fortune 500), Merrill Lynch (now a unit of Bank of America (BAC, Fortune 500)), France's Societe Generale and Germany's Deutsche Bank received billions of dollars in collateral from AIG last fall, according to published reports.
Kohn said questions about the systemic risks posed by AIG extend beyond the health of any given trading partner.
"I wasn't worried so much about the counterparties," Kohn said. "I was worried about other U.S. institutions operating in the markets."
But senators warned that a failure to identify the AIG trading partners could damage the administration's standing on Capitol Hill.
"We have put in approximately $170 billion to $180 billion into one corporation, and you are telling us the counterparties that got par for their bonds or whatever -- the American taxpayer shouldn't know who they are?" asked Sen. Jim Bunning, R-Ky.