Posted on 19 Jan 2010
Continuing congressional scrutiny of the American International Group Inc. (AIG) saga is provoking further backlash against the Federal Reserve as lawmakers ponder diluting the Fed's oversight of banks and weigh Ben Bernanke's confirmation for a second term as Fed chairman.
No issue in the Federal Reserve's financial rescue has drawn as much blowback from lawmakers and the public as the September 2008 move to keep AIG out of bankruptcy with what eventually amounted to more than $180 billion in government aid.
From explaining bonuses paid to its executives to defending accusations that the Fed kept embarrassing details of the rescue from the public, AIG remains a persistent problem for Mr. Bernanke and Treasury Secretary Timothy Geithner, who was president of the Federal Reserve Bank of New York at the time.
In the latest turn, Edolphus Towns (D., N.Y.), chairman of the House Committee on Oversight and Government Reform, has subpoenaed New York Fed documents to shed light on the Fed's role in recommending that AIG withhold names of trading partners that received tens of billions of dollars from the government-backed insurer. Mr. Geithner has been summoned to testify on the issue Jan. 27, along with former Treasury Secretary Henry Paulson, New York Fed General Counsel Thomas Baxter and Stephen Friedman, a Goldman Sachs director and former New York Fed board chairman.
"The AIG debate and how the disclosure of counterparties was handled is just going to fuel the flames in Congress to have more oversight and more ability to control the Fed," said Brian Gardner, a Washington analyst at the investment firm Keefe, Bruyette & Woods.
The fixation on AIG is bipartisan. "This committee's investigation will not be complete until we gain the perspective of all of the most senior government officials responsible for the AIG bailout," Rep. Darrell Issa, top Republican on the House panel, wrote to the committee chairman Friday. Mr. Issa called for Mr. Bernanke to answer questions in writing, and for documents at the Federal Reserve Board and Treasury to be subpoenaed.
The renewed attention on AIG comes with the Fed already in Congress's crosshairs. The Senate, which returns to work Tuesday, is expected to vote in the next two weeks on confirming Mr. Bernanke for a second four-year term; his current term as chairman expires Jan. 31.
Although confirmation is expected, the substantial opposition reflected in Mr. Bernanke's 16-7 backing from the Senate Banking Committee underscored the political challenges the Fed faces. The same Senate committee is working on a proposal to revamp the financial regulatory structure amid substantial interest in curtailing the Fed's role as bank supervisor and consumer regulator because of its failure to head off the financial crisis. The Obama administration sides with the Fed, but Mr. Geithner's ability to influence the Senate on the issue is weakened by his past as a Fed official.
In Congress, members cite AIG regularly to complain about the Fed's authority and disclosure. Some lawmakers also want to force the Fed to disclose the names of banks to which it lends.
Activists on the left and right are using AIG to bolster support for a House-passed bill to allow broader congressional audits of Fed monetary policy, which Mr. Bernanke strongly opposes. Attention on AIG is also reviving debate about the role of the Fed's regional banks and their governance, given the New York Fed's part in the AIG rescue.
"There's been nothing that we've done that's untoward," New York Fed President William Dudley told PBS's Nightly Business Report last week. "We didn't have the ability to pick and choose who was going to lose money on AIG. All we could do was either prevent their bankruptcy or not. When we made the decision to intervene to prevent the bankruptcy, we were protecting everybody. That was our only choice."
AIG remains a lightning rod for public distrust about the bailout of Wall Street—and the controversy shows no sign of going away. Mr. Paulson may draw further attention to the controversy with the Feb. 1 release of his book, "On the Brink."
Last March, Fed Vice Chairman Donald Kohn took heat at a Senate hearing about the Fed's refusal to disclose the counterparties that had been paid off fully after the Fed's rescue. Fed officials feared disclosure would undermine AIG's business—by making other firms reluctant to work with the company—and weaken AIG's trading partners further.
Days after the hearing, AIG released details after the Fed signed off. The list showed Goldman Sachs, Société Générale and 14 other counterparties were paid in full on $62.1 billion of bets on soured mortgage securities, more than banks would have received had AIG filed for bankruptcy. The special inspector general for the Troubled Asset Relief Program later found that the Fed sought to reduce the payoffs to those firms but was rebuffed. Fed officials maintain they had no leverage over the counterparties.
Mr. Bernanke, in his confirmation hearing last month, acknowledged that the Fed's rescue of AIG—while necessary in his view—was continuing to trouble the institution.
"Some of the steps we've taken, like the AIG episode for example, obviously have hurt the Fed a lot politically," he said. "We know that. We did it and I think that should just be proof that we did it for the good of the country. We didn't do it for ourselves because it obviously has hurt the Federal Reserve in the public's view. We did it because we felt that there was no other way to avoid what a number of your colleagues have called the risk of a catastrophic collapse of the financial system."