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)

Reuters NY Fed sought to limit AIG bank disclosures

New York

WASHINGTON (Reuters) - The New York Federal Reserve Bank under Timothy Geithner urged insurer AIG in late 2008 to limit disclosures about its payments to banks after getting a $180 billion government bailout, emails released on Thursday showed.

The email exchanges, between the New York Fed and American International Group Inc lawyers, showed that AIG initially proposed disclosing to the U.S. Securities and Exchange Commission in early December 2008 that it would pay counterparties 100 cents on the dollar to liquidate credit default swaps it sold them.

But the decision to pay Goldman Sachs, Societe Generale and other global banking giants in full with taxpayer funds was not disclosed by AIG until March 2009, when it announced a $93 billion payoff that stoked public rage over the bailout.

Adding fuel to the fire, Geithner, who by then had become the U.S. Treasury secretary, was forced to allow AIG to pay $165 million in bonuses to top executives of the division that nearly caused its collapse.

Representative Darrell Issa, a California Republican who requested the emails from AIG and made them public, said they show that the New York Fed tried to suppress politically sensitive information about the bailout.

"It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information to the SEC," he said in a statement. "The American taxpayers, who own approximately 80 percent of AIG, deserve full and complete disclosure under our nation's securities laws, not the withholding of politically inconvenient information."

The emails showed that an explicit reference to counterparties receiving 100 percent of par value and other information on the transaction was crossed-out from a proposed SEC filing that was "marked up" by attorneys working for the New York Fed.

When the regulatory filing, disclosing a deal for the New York Fed's Maiden Lane III fund to take on an additional $16 billion of AIG obligations, was finally made on December 24, 2008, it made no reference to the counterparty payment percentage. But it did note that about $15.9 billion in payments and surrendered collateral would satisfy a $16 billion "par amount" of obligations.

Banks ultimately received $27.1 billion in payments from Maiden Lane III to liquidate the credit default swaps -- part of the overall $93 billion AIG payout that critics have labeled a stealth bailout of the institutions.

GEITHNER "OFFICIALLY RECUSED"

The New York Fed during Geithner's final weeks at the bank also has been chided for not negotiating hard enough for concessions from the banks after a bailout he helped engineer along with Fed Chairman Ben Bernanke and former Treasury Secretary Henry Paulson. All but one bank refused to offer any discount on their holdings.

Geithner, who has faced criticism for his handling of the AIG bailout throughout his first year in office, was nominated for Treasury secretary on November 24, 2008, by then president-elect Barack Obama, the day much of the email traffic started. Geithner recently said there was little leverage to negotiate with counterparties and that "selectively defaulting" on the obligations could have had disastrous consequences for a financial system in crisis.

Republican Representative Roy Blunt of Missouri said the emails meant Geithner "has some explaining to do."

"Finding out that the leader now responsible for shepherding our economy through these troubled times encouraged bailout recipients to hide the ball is nothing short of stunning," Blunt said in a statement.

Treasury spokeswoman Meg Reilly said that on the day he was nominated, Geithner was "officially recused" from dealing with matters relating to specific companies, including AIG, because of his nomination.

"Secretary Geithner played no role in these decisions," Reilly said.

SEC REQUESTS COUNTERPARTY DETAILS

The email traffic, which Issa requested from AIG in October, shows that attorneys for the New York Fed requested delays in AIG disclosures to the SEC and sought to delete references to "synthetic" collateralized debt obligations and the list of payments to counterparties.

"We believe that the agreements listed in the index (i.e., the Master Investment and Credit Agreement and the Shortfall Agreement) do not need to be filed," Peter Bazos, a Davis Polk & Wardwell lawyer representing the New York Fed, wrote to AIG attorneys on November 25, 2008. "Please let us know your thoughts in this regard."

Six days after the December 24 filing, the SEC said in a private letter to AIG's then chief executive, Edward Liddy, that the insurer should disclose listings of collateral postings for the swaps and name the bank counterparties that were paid. This led to the March disclosure.

Spokespersons for both AIG and Davis Polk in New York declined to comment on the matter.

Thomas Baxter, the New York Fed's general counsel, said it was appropriate for the bank to weigh in on the disclosures, but the final decision rested with AIG and its lawyers.

"Our focus was on ensuring accuracy and protecting the taxpayers' interests during a time of severe economic distress," he said in a statement. "All information was in fact disclosed that was required to be disclosed by the company, showing that counterparties received par value. There was no effort to mislead the public," Baxter said.

(Editing by Padraic Cassidy and Carol Bishopric)