New York Fed papers reveal further details of AIG bailout

Geithner summoned to testify about 'backdoor bailout' of giant US insurer
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The Independent Online

Leaders of the US Congress are investigating allegations of a cover-up over the bailout of AIG in 2008 and payments to some of the biggest banks with exposure to the collapsed insurer.

Concern about the way the Federal Reserve dealt with AIG during the financial panic will be aired tomorrow at a hearing on Capitol Hill which could have political ramifications, including for the future of the Treasury Secretary Tim Geithner. He stands accused of presiding over a "backdoor bailout" of Wall Street that was even more important to its biggest banks than the official bailout mandated by Congress.

Mr Geithner has been called to testify before the House oversight committee about his interactions with AIG when he was chairman of the Federal Reserve Bank of New York, a position he left to join the Obama administration.

The committee has subpoenaed more than 250,000 pages of documents and emails relating to the bailout of AIG in the weeks after Lehman Brothers collapsed in September 2008. The documents show the New York Fed worked to keep key details of AIG's dealings with its counter-parties from having to be disclosed publicly.

Wall Street banks that traded with AIG were handed almost $70bn (£43bn) of public money as part of a restructuring of the insurer's obligations in the credit default swaps market, where huge losses had overwhelmed the company. Sixteen banks, including Goldman Sachs, Barclays and Société Générale, bought these insurance-like derivatives from AIG to guard against defaults on hundreds of securities backed by sub-prime mortgages.

The US government took over AIG in September 2008 because the effects of its collapse would have spread throughout the financial system, with unpredictable consequences. In the subsequent weeks, the Fed examined ways to begin dealing with AIG's unpaid liabilities and shut down its outstanding derivatives positions.

The 16 banks were made whole on their trading positions with AIG, instead of being forced to accept some losses, something which the Republican Congressman Darrell Issa has called a "backdoor bailout". Mr Issa is expected to be an aggressive questioner at tomorrow's hearing, before which the former Treasury Secretary and Goldman Sachs chief executive, Hank Paulson, has also been invited to appear.

The panel is expected to focus not just on the minutiae of AIG's dealings with counter-parties but also on the New York Fed's attempts to keep details of its efforts secret. The Fed took on tens of billions of dollars of exposure to credit default swaps as a result of the bailout. It says it wanted to keep these positions secret because of their commercial sensitivity.

AIG and the Fed both pressed the Securities and Exchange Commission for permission to keep the positions from having to be disclosed. The SEC, according to an email sent by a New York Fed lawyer, agreed to limit the number of its staff who would review the document detailing the Fed's credit default swaps exposure to just two, and to keep the document in a safe while the SEC considered AIG's confidentiality request.

Mr Geithner has said he did not get involved in talks about what should be disclosed. The White House has repeatedly expressed confidence in Mr Geithner in the teeth of gossip about his future, speculation that intensified last week after Mr Obama overruled his Treasury Secretary and imposed new restrictions on the size and activities of Wall Street banks.

Concern on Capitol Hill about the transparency of moves to bail out Wall Street during the crisis has increased in recent months as public fury at the costs of the bailout has mounted. The issue underlies some of the unexpectedly tough opposition to Ben Bernanke's reappointment as chairman the Federal Reserve, which is expected to go before the Senate this week.

The White House has rallied to Mr Bernanke's defence in private calls with senators in recent days, and says it is confident he will win the 60 votes needed to ensure he keeps his job. Mr Obama last night defended Mr Bernanke, telling ABC News: "He has my strongest support. I think he's done a good job."