The New York Federal Reserve Bank actively supported insurer American International Group's regulatory requests to keep its bank counterparties confidential but did not pressure the bailed-out firm for secrecy, the bank's top lawyer said on Tuesday.
In prepared testimony for a much-anticipated congressional hearing, New York Fed General Counsel Thomas Baxter said that the Fed's interest in keeping some information from public view was solely to preserve the value of taxpayer assets.
The hearing, scheduled for Wednesday before the U.S. House of Representatives Oversight and Government Reform Committee, will reexamine painful and controversial decisions made in the fall of 2008 by the New York Fed under Timothy Geithner's leadership to bail out AIG and allow $62.1 billion in payments to banks to retire the insurer's credit default swaps.
Geithner, now U.S. Treasury Secretary, will testify at the hearing in a performance widely seen as important for his future as Treasury chief, and Democrats on the panel came to his defense on Tuesday.
His predecessor, Henry Paulson, who also was deeply involved in AIG bailout decisions, will also testify.
Some have suggested that in November 2008, AIG had planned to disclose the identities of the CDS counterparties and that the New York Fed pressured or compelled AIG not to, Baxter said in his prepared remarks. This is not true.
Baxter said the New York Fed's only interest in the confidentiality requests, particularly for details of individual securities, was preserving the value of taxpayer investments in AIG and in securities purchased by a Fed investment vehicle, Maiden Lane III.
To be sure, the New York Fed actively supported the idea of keeping this information confidential, but once again, only to maximize the value of the Maiden Lane III portfolio for the benefit of the taxpayer, Baxter said in the testimony.
He also defended the New York Fed's decision to pay par value for the securities underlying the credit default swaps, despite criticism that it did not try hard enough to wring concessions from banks, including Societe Generale , Goldman Sachs Group Inc and Deutsche Bank AG .
The New York Fed had little or no bargaining power because of the government's previous bailout of AIG, he said, adding it faced catastrophic consequences for the U.S. economy if it failed to reach a deal to retire the credit default swaps by November 10, 2008, when credit downgrades would have drained AIG of cash and put the insurer on a downward spiral.
In our judgment, taking additional time to press further for a discount was not justified in light of the overwhelming risk and catastrophic consequences of failing to complete the transaction by November 10, Baxter said.
REPUBLICANS SEE FED COVER UP
U.S. Rep. Darrell Issa, the committee's top Republican who has spearheaded an investigation into AIG's payments to banks, has accused the New York Fed of orchestrating a cover up of the payments to avoid public scrutiny.
Issa, a Californian, said in a Republican staff report to the committee that email traffic showed the New York Fed directed its attorneys to edit AIG's filings with the Securities and Exchange Committee to make them more difficult to understand.
The Fed also likely wasted billions of taxpayer dollars by paying par value to banks for securities backing the AIG derivative contracts, he charged.
The secrecy, concealment and lack of transparency in the Federal Reserve's actions have important implications for the continued health of democracy and free markets, Issa wrote in his report.
The committee's majority Democratic staff, however, said that there was no evidence in any documents to suggest that Geithner himself knew about AIG's plans or counseled AIG not to disclose payments it was making to banks.
But the Democrats added: We now believe that the NYFRB should have forced the counterparties to take less than 100 cents on the dollar.
Also set to testify is Stephen Friedman, the New York Fed's former chairman, who along with Paulson, is a former chairman of Goldman Sachs.
Goldman received $14 billion of those payments and Friedman at the time sat on Goldman's board. In December 2008, he bought a large block of Goldman Sachs stock.
Paulson is expected to stick to a line of testimony that he provided on the AIG matter in a hearing last year -- that he had no role whatsoever in any of the Fed's decisions regarding payments to any of AIG's creditors or counterparties.
Paulson worked closely with Geithner and Fed Board Chairman Ben Bernanke to cobble together the AIG bailout, which started with an $85 billion Fed loan in September 2008 and later grew to more than $180 billion. The bank payments were negotiated in late October and early November.
In terms of AIG, my role was giving the Fed support as they made this decision (to loan AIG money.) But once the action was taken, I had no dealing. So I just don't know the detail, Paulson said in the July 2009 hearing.