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NY Fed Told AIG Not to Disclose Swap Details

Source: NY Times

Posted on 07 Jan 2010

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Starting in November 2008, the Federal Reserve Bank of New York under Timothy Geithner began urging American International Group (AIG) to limit disclosure on payments made to banks at the height of the financial crisis, e-mail messages obtained by DealBook show.

The e-mail exchange between the bailed-out insurance giant and its regulator portray a strange reversal of roles, with AIG staff arguing for the disclosure of certain details on payments for credit-default swaps to major banks, only to be discouraged by officials at, or representing, the Federal Reserve.

In a draft of one regulatory filing, AIG stated that it had paid banks — including Goldman Sachs Group, Merrill Lynch, Societe Generale and Deutsche Bank — the full value of C.D.O.s, or collateralized debt obligations, that they had bought from the company. In the response to that draft from the law firm Davis Polk and Wardwell, which represented the New York Fed, that crucial sentence was crossed out, and did not appear in the final version filed on Dec. 24, 2008.

By the end of that month, AIG had become the proxy in tug-of-war between government agencies, with the Securities and Exchange Commission asking the company to revise its disclosure, which the regulator saw as falling short of full compliance.

In a March 12 e-mail message whose subject line is “Fw: counterparties” — importance: “high” — Kathleen Shannon, a senior vice president at AIG, writes:

“In order to make only the disclosure the Fed wants us to make, which we understand to be to not include the CUSIPs or Tranche names and give the amounts by counterparty on a total rather than a transaction by transaction basis, we need to have a reasonable basis for believing and arguing to the SEC that the information we are seeking to protect is not already publicly available.”

(Cusips are alphanumeric tags for securities which identify the issuer and help facilitate the clearing and settlement of trades.)

The messages were initially obtained by Representative Darrell Issa, Republican of California and ranking member of the House Oversight and Government Reform Committee, and first reported by Bloomberg News.

“It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information to the S.E.C.,” Representative Issa said in an e-mailed statement.

Mark Herr, a spokesman for AIG, said the company refused to comment. Ethan T. James, a partner at Davis Polk and Wardwell who advised the Federal Reserve Bank of New York on the AIG situation, and who was copied on a number of the e-mail messages, was not immediately available for comment.

AIG, once the biggest insurance company in the United States, had to be bailed out by the Federal Reserve after it collapsed in September 2008 because of commitments it had made to insure mortgage-backed securities. By June of last year, the government’s bill for the bailout totaled $182 billion.

Tens of billions of that money went into payments that AIG made on credit default swaps, or agreements it had entered into with banks to cover losses if and when mortgage-backed securities went into default, which they did as the subprime mortgage crisis unfurled.

The banks that held the mortgage-backed securities, also known as C.D.O.s, had made agreements with AIG to insure against their losing value. Some felt that a bankruptcy at the insurance giant might endanger the entire financial system, and that reasoning led to the bailout.

The rescue of AIG, then, was the rescue of its counterparties, the banks that held the mortgage-backed securities, and the terms of that rescue, according to the e-mail messages, are precisely what the Federal Reserve urges A.I.G. to hide.

In an October letter to William C. Dudley, the president of the New York Federal Reserve, Rep. Issa writes: “As you know, in late 2008 American International Group (“AIG”) was attempting to negotiate a haircut for banks that held $62 billion in credit default swaps (“CDS”) from AIG. AIG was reportedly seeking to persuade the banks to accept haircuts of as much as 40 cents on the dollar in order to retire these CDS contracts.”

Whether or not the Federal Reserve could, in fact, have negotiated lower terms for the credit default is a matter of ongoing debate, but what seems to emerge from the e-mail exchange obtained Thursday is that those terms were deemed unpalatable if made public, and therefore buried.