AIG and NY Fed under fire for hiding bailout facts

By David Goldman, staff writer


NEW YORK (CNNMoney.com) -- AIG and the Federal Reserve Bank of New York have become targets of an investigation into whether the overseer had instructed the troubled insurer not to disclose certain key information to the public.

Neil Barofsky, special inspector general for the $700 billion bailout, is set to tell the House Oversight Committee on Wednesday that he has initiated an investigation into whether the New York Fed instructed AIG (AIG, Fortune 500) not to disclose more than a dozen controversial counterparty transactions to the Securities and Exchange Commission.

AIG payouts: Who got what
Counterparties that got more than $1 billion from the government and AIG.
AIG counterparty Total payment
Societe Generale $16.5 billion
Goldman Sachs $14 billion
Deutsche Bank $8.5 billion
Merrill Lynch $6.2 billion
Calyon $4.3 billion
UBS $3.8 billion
Deutsche Zentral Genossenschaftsbank $1.8 billion
Barclays $1.5 billion
Bank of Montreal $1.4 billion
Royal Bank of Scotland $1.1 billion
Wachovia $1 billion
Source:Special Inspector General for the Troubled Asset Relief Program.

The New York Fed, one of the primary overseers of AIG's $181 billion bailout, was headed by current Treasury Secretary Timothy Geithner when the counterparty transactions in question were made.

The Oversight Committee will hold a hearing on the matter on Wednesday at 10 a.m. ET. Barofsky, Geithner, former Treasury Secretary Henry Paulson and the lead attorneys for the New York Fed and AIG are all slated to testify at the hearing.

Geithner, in prepared testimony for the hearing, denied any part in withholding counterparty transaction information.

"I had no role in making decisions regarding what to disclose about the specific financial terms of Maiden Lane II and Maiden Lane III (the companies established by the New York Fed to buy AIG's troubled assets), and payments to AIGs counterparties," he said.

According to an advanced copy of his testimony, Barofsky will try to determine if there was "any misconduct relating to the disclosure or lack thereof" concerning the counterparty transactions. Barofsky will also announce an investigation into whether the Federal Reserve fully cooperated with his office in its audit of AIG (AIG, Fortune 500).

The probe follows an audit on AIG issued in November by Barofsky. That audit found that the New York Fed, then under the direction of Geithner, failed to use its clout to negotiate concessions from AIG's business partners.

As a result, $62.1 billion of taxpayer and AIG funds were essentially funneled to 16 banks that were counterparties to AIG insurance contracts. That amount represented the full-dollar value of the underlying assets that the counterparties had insured through AIG.

After the audit was released in November, House Oversight Committee Ranking Member Darrell Issa, R-Calif., asked Barofsky for copies of correspondence between the New York Fed and AIG. But Barofsky told Issa that he couldn't hand over a copy of the records because the New York Fed told him not to share them.

The Committee, chaired by Rep. Edolphus Towns, D-N.Y., subpoenaed the New York Fed for the documents earlier this month and recently received 250,000 pages of e-mails and other correspondence.

In its investigation of those documents, the Committee found that the New York Fed had urged AIG not to make any reference in its SEC filing that the counterparties had received the dollar-for-dollar value.

In dozens of e-mail conversations, the New York Fed expressed concern that the details of the counterparty transactions would be made public. In a Nov. 11, 2008, conversation, New York Fed official Alejandro LaTorre urged his colleagues to delete a reference to the full payouts from a request for proposals soliciting administrators for the counterparty transactions.

"As a matter of course, we do not want to disclose that the concession is at par unless absolutely necessary," LaTorre wrote.

Rep. Issa argued that the documents reveal a "secretive culture" at the New York Fed in which the overseer attempted to hide information from the public.

"It has become alarmingly clear that public disclosure was the last thing on the minds of the government officials charged with protecting the taxpayers' interests," Issa said in a statement. "Instead of disclosing as much information as available at the earliest possible opportunity to the American people, they did everything in their power to limit disclosure."

It's because of the Oversight Committee's release of the New York Fed's documents that SigTARP Barofsky decided to launch his investigations.

Fed Chairman Ben Bernanke, who will not appear at the hearing on Wednesday, asked the GAO last Tuesday to investigate "all aspects of our involvement in the extension of credit to AIG" in order to "afford the public the most complete possible understanding of our decisions and actions in this matter."

AIG declined to comment, and the New York Fed did not immediately return requests for comment. SigTARP confirmed that there were "multiple ongoing investigations" into the New York Fed and AIG, but Barofsky declined an interview request. To top of page

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