NU Online News Service, Jan. 26, 2:03 p.m. EST
A searing minority report by Republicans has scored the Federal Reserve and Treasury for being "deceptive and dishonest" about the government bailout of American International Group.
The special report, accusing federal officials of a cover-up and blasting the actions of Treasury Secretary Timothy Geithner, was issued by the House Committee on Oversight and Government Reform under the aegis of ranking minority member Rep. Darrell Issa, R-Calif.
The full committee is due to hold a hearing tomorrow on the AIG bailout details. The minority report concluded that "the secrecy, concealment and lack of transparency in the conduct of the Federal Reserve [concerning the AIG bailout] have serious implications for the continued health of democracy and free markets."
At issue is the federal government's decision to pay off collateral AIG owed to large banks for insurance it provided in the form of credit default swaps (CDS) to support financial assets including bundles of subprime mortgages at 100 cents on the dollar.
AIG posted collateral to its CDS counterparties through September and October of 2008 and by Nov. 5, 2008, AIG had drawn down approximately $61 billion of its initial $85 billion line of credit from the Federal Reserve Bank of New York, then headed by Mr. Geithner, the report said.
Alternatives to having AIG pay off the AIG CDS obligations at anything less than par were rejected by FRBNY officials, and they never seriously tried to negotiate with the banks to take reduced payments–"a haircut," according to the report.
It cited a report by Neil M. Barofsky Special Inspector General for the Troubled Asset Relief Program stating "Mr. Geithner concurred, and it was decided that FRBNY would cease efforts to negotiate haircuts…"
"These decisions began the backdoor bailout of AIG's counterparties, and the direct payment of $27.1 billion of taxpayer money (and the waiver of an additional $35 billion in collateral) to the largest banks in the U.S. and around the world," said the committee report.
Once the decision to pay counterparties at full value had been made, the report charges that the FRBNY began to cover up details about the transactions and its law firm Davis Polk & Wardwell edited AIG Securities and Exchange Commission filings to remove information about the payments.
FRBNY, the report said, pressured AIG not to make disclosures and pressured the SEC to accept a confidential filing concerning the payments, and not until March 2009–after public pressure–were the names of bank counterparties disclosed.
The committee report said Mr. Geithner's "role in the AIG cover-up remains unclear" and noted his statement that he was not involved in a decision to avoid disclosure, but said documents suggested he was "at a minimum engaged personally in reviewing what information about the AIG bailout would be revealed to Congress and the public."
"At a minimum the cover-up of the details about AIG's counterparty payments began on Secretary Geithner's watch" and FRBNY behavior reflected his leadership, said the report, and called on him to state whether FRBNY conduct was appropriate.
According to the minority report, the FRBNY has not fully complied with a subpoena, so it cannot learn the "full extent of the FRBNY's efforts to conceal information about the counterparty payments from this committee and the public over the last eight months."
Mr. Issa has asked Committee Chairman Edolphus Towns, D-NY, to hold FRBNY officials in contempt if they do not comply and to issue more subpoenas.
The report noted that Mr. Geithner would not submit to an interview from Mr. Issa before tomorrow's hearing, but did meet with a Democratic member of the committee, Rep. Elijah Cummings, D-Md., on Jan. 15. Mr. Barofsky in addition to Mr. Geithner is due to appear,
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