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US House Committee to Grill Geithner About Nondisclosure Guidance to AIG

Source: BestWeek

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Posted on 12 Jan 2010

U.S. Treasury Secretary Tim Geithner will be questioned soon before the House's Oversight and Government Reform Committee in a hearing focused on instructions allegedly given to American International Group Inc. to withhold information from the public during the 2008 peak of the financial crisis.

AIG had allegedly been advised in a series of e-mails from officials of the Federal Reserve Bank of New York to not disclose information about its full-cost payouts to counterparties, which critics of the payments argue could have been priced significantly lower, saving taxpayers a considerable amount in the bailout of AIG. Geithner was president of the FRBNY at that time.

The e-mails had only recently come to light, detailing FRBNY's advice to AIG regarding the release of information on settling creditor debt, and identifying those big-bank counterparties. The e-mails were released by Rep. Darrell Issa, R-Calif., ranking Republican on the oversight committee.

The FRBNY, though, released a statement saying its then-president wasn't aware of the communications. "Matters relating to AIG securities law disclosures were not brought to the attention of Mr. Geithner," Thomas Baxter, long-time general counsel and executive vice president of the legal group at the FRBNY, wrote in a letter to Issa. In his judgment, Baxter said, "disclosure matters of this nature did not warrant the attention of the president."

Issa responded with a statement: "It's a staggering admission by Mr. Baxter that he felt strong enough that Secretary Geithner wanted him to limit AIG's disclosures on counterparty payments to the [Securities and Exchange Commission] that he says he didn't even feel a need to bring the details to his boss' attention. This letter raises more questions on the inner-workings of the New York Fed during one of the most pivotal periods in our nation's history."

The exposure of the e-mails was enough to convince Rep. Edolphus Towns, chairman of the oversight committee, to call for a hearing the week of Jan. 18. "More than one year after the first federal bailout of AIG, the American people continue to question where their tax dollars were really sent when the government rescued this company," Towns said in a statement. "I continue to believe that a comprehensive review of the rise and fall of AIG, and the involvement of counterparties can provide a useful vehicle to understanding how inadequate regulations, cheap money, risky business deals, and in some instances, corruption led to the current economic crisis."

Baxter is also scheduled to testify at the hearing.

During the government bailout, the companies that AIG's financial products subsidiary had credit default swap contracts with were paid tens of billions to release AIG -- amounting to full price instead of downward-negotiated amounts that could have been more appropriate, according to a recent report from the Troubled Asset Relief Program's special inspector general, Neil M. Barofsky.

In November 2008, the U.S. government restructured its ongoing help of AIG, putting about $30 billion into the termination of credit default swaps contracts with a number of AIG counterparties. Barofsky's audit of that arrangement accused the FRBNY of making "several policy decisions that severely limited its ability to obtain concessions from the counterparties." (BestWire, Nov. 17, 2009).

AIG is still in the process of restructuring itself and selling off assets to pay back its government debt, currently leaving it with the federal government as the owner of the vast majority of the international company.


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