The AIG fiasco keeps getting worse

NEW YORK (Fortune) -- The AIG bailout isn't going away, much as Treasury Secretary Tim Geithner might like it to.

The $180 billion fiasco was back in the news Thursday, after Bloomberg reported that the Federal Reserve Bank of New York prodded the troubled insurer at the end of 2008 to withhold some gory details of its bailout deal from the public.

The instructions came at a time when Geithner, who is now the Treasury secretary, led the New York Fed. Along with Fed chief Ben Bernanke and former Treasury Secretary Henry Paulson, Geithner was one of the key architects of the federal response to the economic meltdown of 2008.

The New York Fed says the final decision on disclosures always rested with AIG (AIG, Fortune 500), which since September 2008 has been propped up by multiple infusions of taxpayer funds. But the claim rings hollow, given all the bailout-information jockeying of the past year.

Around the time the New York Fed was striking details from an AIG securities filing, former Bank of America (BAC, Fortune 500) chief Ken Lewis was deciding not to let investors in on what a disaster the bank's purchase of brokerage firm Merrill Lynch was shaping up to be.

Lewis claimed Paulson and Bernanke pressured him not to disclose growing losses at Merrill to shareholders -- a claim the policymakers rejected and that many observers pooh-poohed.

Just a few months later, the Washington Post revealed that regulators at the Federal Housing Finance Authority had pressured executives at troubled mortgage financing company Freddie Mac (FRE, Fortune 500) not to disclose the cost of carrying out its expanded federal housing-market support duties.

In that case, Freddie Mac made the disclosure, though only after negotiating with regulators over its wording.

The common theme seems to be that government officials "don't want to do anything to spook the public or investors," said Peter Cohan, a management consultant in Marlborough, Mass. "Of course, then you end up with a lot of other fallout later, as we can see now."

Emails disclosed Thursday showed that the New York Fed instructed AIG to withhold from a securities filing information on the counterparties that received taxpayer money in AIG's bailout, including the fact that the counterparties got 100% of their investment back.

That information remained secret for months, until Congress pressured the Federal Reserve to give it up in March, over the Fed's insistence that doing so would damage market confidence.

A week after Fed Vice Chairman Donald Kohn was lambasted by senators for the failure to disclose the recipients, AIG published the list, which was topped by France's Societe Generale and Goldman Sachs (GS, Fortune 500).

"The whole line that there would be a panic if they disclosed the counterparties, that was total BS," Cohan said. "It was just a backdoor bailout of the banks on the other side of those trades."

Nine months later, the issue remains a headache for the never-popular Geithner. Bernanke, who played no role in the emails released Thursday but has yet to be confirmed for a new term by the full Senate, could face a tougher grilling later this month as bailout rage builds in Congress.

However they fare politically, officials may find it tough to live down the images formed by their apparent efforts to thwart bailout disclosure, Cohan said.

"It makes you think they were panicked and terrified, and you just don't know the whole picture," he said.