Posted on 17 Nov 2009
The Federal Reserve Bank of New York, in its rush to rescue American International Group Inc. (AIG), left itself little negotiating room before it cut a deal last November with banks that were the giant insurer's trading partners, a new government audit says.
That lack of bargaining power helped result in those banks being paid off in full for credit-market bets tied to troubled mortgage-linked securities, according to the audit, which was conducted by the special inspector general for the Troubled Asset Relief Program. Banks that benefited from those payouts included Goldman Sachs Group Inc., Merrill Lynch and large French banks Société Générale and Calyon, which were represented by the French bank regulator in negotiations with the New York Fed last November, the report said.
The New York Fed, in a letter accompanying the report, says it "acted appropriately" in its dealings with AIG's counterparties. It added that its intervention in the insurer "was designed to prevent a system-wide collapse and achieved that end" by protecting the interests of AIG's insurance policyholders, debtholders, retirement plans, municipalities and other entities.
The "SIGTARP" audit provides a window into a bailout effort that has been shrouded by a lack of disclosure -- acknowledged in the report -- and questions over why the U.S. government in effect funneled tens of billions of dollars to U.S. and European banks that were AIG's trading partners.
In November 2008, less than two months after the New York Fed first bailed out AIG with an $85 billion credit line, the government restructured its aid to AIG as the insurer's cash needs mounted amid the market downturn. The revamped package included a company called Maiden Lane III buying complex mortgage-linked securities from U.S. and European banks to cancel insurance contracts that AIG's financial–products division had written on the securities. The banks were effectively paid par, or 100 cents on the dollar, for those securities, which had declined significantly in value due to rising home-loan defaults.
The report acknowledged challenges the regulators faced, including insistence by most of the banks and a French bank regulator that they be paid in full. But the report said the "refusal" of the Federal Reserve and New York Fed "to use their considerable leverage," in negotiations with the trading partners "made the possibility of obtaining concessions from those counterparties extremely remote."