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Watchdog Opens Probe into AIG's Payout to Partners

Source: WSJ

Posted on 26 Jan 2010

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A U.S. government investigator is opening a probe into disclosures made as part of the government's rescue of American International Group Inc. when the company's trading partners were paid billions in November 2008.

Neil Barofsky, the special inspector general for the $700 billion Troubled Asset Relief Program, plans to tell a U.S. House panel Wednesday that he is investigating whether there was any "misconduct relating to the disclosure or lack thereof" surrounding the deals, in which banks who had traded with the giant insurer got paid in full on $62 billion in bets on soured mortgage securities.

Mr. Barofsky said he is also reviewing the Federal Reserve's cooperation with his office. Issues raised in recent weeks "call into question whether the government has been and is being as transparent as possible with the American people," he said in prepared remarks for a Wednesday hearing before the House Committee on Oversight and Government Reform.

The probe is likely to ratchet up the heat on the Federal Reserve, which lately has been under some of the most intense scrutiny from Congress it has ever faced. Chairman Ben Bernanke is the focus of a heated debate in the U.S. Senate over whether he should be confirmed to serve a second term as head of the central bank.

The Fed's New York office has been a main overseer of the U.S. bailout of AIG. Wednesday's hearing will include testimony from Treasury Secretary Timothy Geithner and the top lawyer from the Federal Reserve Bank of New York, which Mr. Geithner headed when AIG was first rescued.

Panel Republicans, in a memo prepared for the hearing and distributed Monday, said Mr. Geithner "needs to explain his role" in the November 2008 negotiations between the government and AIG to help stabilize the insurer by paying off its counterparties at 100 cents on the dollar.

A Federal Reserve spokeswoman said Mr. Bernanke last week invited a top-to-bottom review of AIG-related matters by a congressional watchdog group, offering to make all resources available. The New York Fed on Monday night said that it "has fully cooperated with the Special Inspector General for TARP and will continue to do so."

Among the issues that have emerged in recent weeks and months are why the Fed resisted releasing the names of AIG's trading partners and why it was reluctant to acknowledge that they received 100 cents on the dollar when they agreed to tear up their contracts with AIG.

The Republican memo cites a New York Fed employee's email from March of last year acknowledging the names of AIG's trading partners would likely come out. "There were too many people involved in the deals—too many counterparties, too many lawyers and advisors, too many people from AIG—to keep a determined Congress from the information," James Bergin emailed.

The Treasury Department has said Mr. Geithner wasn't involved in the discussions over whether AIG should publicly disclose the names of its trading partners, which included Goldman Sachs Group Inc. among others. Thomas Baxter, general counsel for the New York Fed, told congressional investigators that the discussions didn't reach the level of Mr. Geithner.

New documents reviewed by The Wall Street Journal further suggest that New York Fed officials were reluctant to disclose in writing that AIG's counterparties were being paid off at 100%.

In November 2008, a Fed official urged deleting a reference to the 100% payouts from a request for proposals being sent to service providers. The RFP was for the so-called Maiden Lane III structure, formed to facilitate the New York Fed's financial assistance to AIG.

A draft of the RFP said that "As consideration for the transactions, the counterparties will be paid aggregate consideration equal to the total notional exposure ..." But an email from a New York Fed official, Alejandro LaTorre, says: "Let's eliminate the second sentence that starts with 'As consideration....' As a matter of course, we do not want to disclose that the concession is at par unless absolutely necessary. In this case, not sure it is necessary because this has nothing really to do with the ML III structure." The sentence was subsequently deleted from the draft RFP, according to documents. Rep. Darrell Issa of California, the committee's top Republican, criticized the deletion as "secretive."

A Fed spokeswoman pointed to an earlier comment in which the Fed denied that it encouraged AIG to withhold information, and said that the 100% payouts to AIG's counterparties were "widely understood at the time." The RFP was intended for a limited number of potential service providers, and the amounts paid to counterparties were not relevant for those bidding to provide services, according to the New York Fed.