House panel to subpoena N.Y. Fed over AIG

NEW YORK (CNNMoney.com) -- The House Oversight Committee will issue subpoenas Tuesday to the Federal Reserve Bank of New York to get its correspondence with rescued insurer American International Group.

The subpoenas are the latest tit-for-tat in an ongoing controversy about the $180 billion bailout to AIG (AIG, Fortune 500). They follow reports earlier this month that the New York Fed, the regional bank charged with oversight of monetary policy and financial institutions, suggested in 2008 that the troubled insurer should withhold some details of its bailout deal from the public.

"This subpoena will provide the committee with documents that will shed light on how and why taxpayer dollars were used for a backdoor bailout," Rep. Ed Towns, D-N.Y., the committee chairman, said in a statement.

But the issuing of the subpoenas is more of a mud-in-your-eye move for the House panel.

The House Oversight panel noted the reports of withholding information and announced it planned to hold a new hearing on the issue some time next week, on a date still to be determined.

As a part of the panel's fact-finding research for the hearing, Rep. Darrell Issa, R-Calif., asked for copies of correspondence between the Fed and AIG that happened to be in the possession of the special inspector general for the $700 billion bailout, known as SIGTARP.

As the special inspector general, Neil Barofsky used that information to release a report in November criticizing federal regulators for not getting a better deal and negotiating more concessions from business partners of the troubled insurer.

But Barofsky wrote Issa on Tuesday saying he couldn't hand over a copy of the records because the Fed told him not to share them.

"The Federal Reserve has directed us not to provide you with the documents that it has provided us, and that it will instead respond to your request directly," Barofsky wrote.

Barofsky wrote that "while we regret the Federal Reserve's position," that handing over the records "could severely limit our ability to receive documentation" from the Fed in the future. And, he added, some of the records are now being used in ongoing investigations.

A SIGTARP spokeswoman declined to comment.

So that's when the House committee took matters into its own hands and released a statement saying the subpoenas would be on the way to the New York Fed.

The New York Fed pledged to "work with the committee to provide relevant information as appropriate," spokesman Jack Gutt said.

"The FRBNY's clear intent is to prevent this committee's oversight of the AIG counterparty payments for as long as possible," Issa, the panel's ranking Republican, said in a statement.

The records promise to be interesting. They prompted Barofsky's office to report that some $62.1 billion of taxpayer and AIG funds were essentially funneled to 16 banks, which were counter parties to AIG insurance contracts.

The banks got paid 100% of what they were owed, the full-dollar amount of the underlying assets that the counter parties had insured through AIG.

The reports that AIG had been instructed to obscure counter party data has caused a new stir on Capitol Hill, with many criticizing Treasury Secretary Tim Geithner, who was running the New York Fed at the time.

However, Geithner was not in the loop on the decisions, since he had recused himself from issues involving AIG while he was under consideration for the Treasury job, officials have said.

However, Geithner, along with Fed chief Ben Bernanke and former Treasury Secretary Henry Paulson, are considered key architects of the federal response to the economic meltdown of 2008.

The New York Fed has said the final decision about disclosures always rested with AIG, which since September 2008 has been propped up by multiple infusions of taxpayer funds.