WASHINGTON BUREAU — The House Oversight and Government Reform Committee will hold a hearing in two weeks on allegations that Federal Reserve System officials ordered American International Group Inc. (NYSE:AIG) not to disclose details concerning a decision to pay collateralized debt obligation counterparties 100 cents on the dollar.
Rep. Edolphus Towns, D-New York, chairman of the committee, announced today that he will invite Treasury Secretary Timothy Geithner and Thomas Baxter, general counsel of the Federal Reserve Bank of New York, to testify at the hearing.
Towns expects to hold the hearing during the week that starts Jan. 18, when Congress returns from its holiday break.
"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 says. "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."
The New York Fed provided more than $180 billion in support for AIG in September 2008, to help keep the company from becoming insolvent.
AIG used some of the money to meet obligations to counterparties in transactions involving instruments such as collateralized debt obligations. The list of institutions that received the payments included companies such as Goldman Sachs Group Inc., New York; Soci?t? G?n?rale S.A., Paris; Barclays P.L.C., London; and BNP Paribas S.A., Paris.
AIG paid 100 cents on the dollar on the counterparty obligations.
House Republicans say they have copies of documents describing how AIG drafted a report filed with the U.S. Securities and Exchange Commission Dec. 24, 2008.
A draft e-mail provided by Rep. Darrell Issa, R-Calif., the highest-ranking Republican on the House Government Reform Committee, indicates that New York Fed officials asked AIG to change the Dec. 24 report to leave out the names of the financial institutions that received 100 cents on the dollars, and to leave out the amounts paid to those companies.
The final version of the Dec. 24, 2008, filing did not include the amounts and the names of the institutions that AIG paid. The names and amounts were not disclosed until May 2009, after members of the Senate Banking, Housing and Urban Affairs Committee and the House Financial Services Committee demanded the information.
AIG gave Issa documents showing that the SEC asked AIG why the names and amounts were not disclosed.
The documents obtained by Issa also seem to indicate that, at the request of the Fed, AIG left out a disclosure about investments in $10 billion in collateralized debt obligations that the Fed had acquired at a discount in exchange for giving AIG cash.
"There is no more urgent business before the [House Financial Services] Committee, and this hearing should be given the highest priority," Rep. Spencer Bachus, R-Ala., the highest ranking Republican on the committee. "For months, the public was prevented from knowing the names of AIG's counterparties and the extent to which AIG fulfilled its obligations to those firms…. This calculated attempt to withhold important information from the public and market participants runs counter to the principles of our capital markets."
Bachus refers directly in the letter to Timothy Geithner, who was head of the New York Fed at the time when the Federal Reserve System and the Bush administration made the decision to provide more than $180 billion to AIG in return for 79.9% of AIG's stock.
Geithner was not involved in the decisions now being questioned by House Republicans, says Meg Reilly, a Treasury spokesman.
"Secretary Geithner played no role in these decisions and indeed, by Nov. 24, he was recused from working on issues involving specific companies, including AIG," Reilly says.
The Federal Reserve System and the Treasury Department jointly agreed to provide aid to AIG because AIG's financial condition was deteriorating to the point that it was unable to provide counterparties with the amount of additional collateral required by the contracts, according to information disclosed at the time.
The New York Fed set up 2 limited liability companies Maiden Lane II L.L.C. and Maiden Lane III L.L.C., to serve as vehicles for helping AIG.
"It was appropriate as a party to the Maiden Lane III transactions for the New York Fed to comment on a number of issues, including disclosures, with the understanding that the final decision rested with AIG and its external securities counsel," New York Fed General Counsel Thomas Baxter says in a statement. "Our focus was on ensuring accuracy and protecting the taxpayers' interests during a time of severe economic distress."
AIG disclosed all of the information that the company was required to disclose, "showing that counterparties received par value," Baxter says. "There was no effort to mislead the public."
Baxter also defended Geithner.
"Matters of AIG securities law disclosure would not have been brought to the attention of the president of the Federal Reserve Bank of New York," Baxter says.
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