Sit down before you read about New York in this article - Fed defends actions in AIG case, invites inquiry

New York

WASHINGTON (Reuters) - Federal Reserve officials on Tuesday launched a vigorous defense of their dealings with American International Group, calling for a congressional audit and denying any inappropriate action with respect to payments the bailed-out insurer made to banks.

Fed Chairman Ben Bernanke invited a full congressional audit of the U.S. central bank's dealings with AIG and the New York Federal Reserve Bank turned over 250,000 pages of documents to a House committee that has scheduled a hearing on the matter next week.

The U.S. House of Representatives Oversight and Government Reform Committee is investigating whether the New York Fed improperly limited public disclosures about payments to banks to unwind $62.1 billion in AIG credit default swaps.

The head of the committee has called the payments a "backdoor bailout" for banks.

Lawmakers are angry at the Treasury Department and the Fed over the AIG bailout, which cost about $180 billion, and over bonuses paid to AIG executives. That has helped fuel some opposition to Bernanke's bid for a second term as Fed chief, though he is still expected to win approval in a full Senate vote that could come this week.

GEITHNER ON HOT SEAT

Treasury Secretary Timothy Geithner, who was New York Fed chief at the time AIG was rescued in 2008, is to testify before the committee next Wednesday. He has denied that he had a hand in any advice to AIG about limiting disclosure.

In a lengthy memo posted on its website, the New York Fed pushed back against a number of claims made after a lawmaker released a batch of emails showing the New York Fed counseled AIG not to explicitly state it was paying banks 100 cents on the dollar on credit default swaps it had written.

The New York Fed said it was "incorrect" to say that as a result of its actions, AIG did not tell the Securities and Exchange Commission that it was paying banks including Goldman Sachs Inc at par to settle the swaps contracts after the insurer received a taxpayer bailout.

AIG, in filings with the SEC, said the securities were being bought by letting banks retain collateral and by making cash payments that -- taken together -- roughly equaled the full value of the swaps, the Fed said.

DIDN'T LEAN ON AIG

The New York Fed also disputed charges that it leaned on AIG not to make required disclosures to regulators about the transactions.

"Some have ... suggested that the (New York Fed) pressured AIG not to make required disclosures about material elements of the Maiden lane III transactions," the Fed said, referring to the special entity it set up to fund the rescue of AIG swaps contracts.

"This is also incorrect," the New York Fed asserted.

The central bank further denied that it was as a result of pressure from it that AIG sought to keep the names of the counterparties under wraps.

When pressed to disclose the names by the SEC, AIG sought confidentiality, fearing those firms and others might sever businesses ties over a breach of trust, the New York Fed said. AIG disclosed the names months later under pressure from lawmakers.

(Reporting by David Lawder, Mark Felsenthal and Rachelle Younglai, writing by Glenn Somerville; Editing by David Gregorio)