AIG and the Federal Reserve Bank of New York are targets of an investigation into whether the overseer had instructed the troubled insurer not to disclose certain key information to the public.
Neil Barofsky, special inspector general for the $700 billion bailout will tell the House Oversight Committee on Wednesday that he has initiated an investigation into whether the New York Fed instructed AIG not to disclose more than a dozen controversial counterparty transactions to the Securities and Exchange Commission. He will try to determine if there was "any misconduct relating to the disclosure or lack thereof" concerning the counterparty transactions. Barofsky also announced an investigation into whether the Federal Reserve fully cooperated with his office in its audit of AIG.
AIG's $181 billion bailout, was headed by Secretary Geithner when the counterparty transactions in question were made. The probe was announced after an audit on AIG issued in November by Barofsky. The audit found that the New York Fed failed to use its clout to negotiate concessions from AIG's business partners. Specifically at issue- $62.1 billion of taxpayer and AIG funds were funneled to 16 banks that were counterparties to AIG insurance contracts-and the fact that this amount represented the full-dollar value of the underlying assets that the counterparties had insured through AIG instead of a better negotiated discounted value which many believe could have easily been negotiated.
AIG/Government payouts to counterparties greater than $1 billion:
Societe Generale $16.5 billion
Goldman Sachs $14 billion
Deutsche Bank $8.5 billion
Merrill Lynch $6.2 billion
Calyon $4.3 billion
UBS $3.8 billion
Deutsche Zentral Genossenschaftsbank $1.8 billion
Barclays $1.5 billion
Bank of Montreal $1.4 billion
Royal Bank of Scotland $1.1 billion
Wachovia $1 billion
More importantly, at issue is the "secretive culture" at the New York Fed in which the overseer attempted to hide information from the public. After the audit was released in November, House Oversight Committee Ranking Member Darrell Issa, R-Calif., asked Barofsky for copies of correspondence between the New York Fed and AIG, but Barofsky told Issa that he couldn't hand over a copy of the records because the New York Fed told him not to share them with the Oversight Committee.
What were they hiding?
The Committee subpoenaed the New York Fed for the documents earlier this month and recently received 250,000 pages of e-mails and other correspondence. Upon review, the committee found that the New York Fed had urged AIG not to make any reference in its SEC filing that the counterparties had received the dollar-for-dollar value. Giethner's people expressed concern that the details of the counterparty transactions would be made public. In a Nov. 11, 2008, conversation, New York Fed official Alejandro LaTorre urged his colleagues to delete a reference to the full payouts from a request for proposals soliciting administrators for the counterparty transactions.
"As a matter of course, we do not want to disclose that the concession is at par unless absolutely necessary," LaTorre wrote.
It is painfully obvious that the New York Fed was well aware that negotiating with counterparties on a dollar for dollar basis was overpaying. Timothy Geithner and his cronies did all they could to cloak the payments from the Oversight Committee and from the SigTARP because they knew at the time, this would be viewed exactly as the back room dealing it was. Former employees of the wealthiest banks in the world utilizing their influence to flow TARP funds to their brethren who, if negotiating at arms length, would never have received full value.
The Oversight Committee will hold a hearing on the matter on Wednesday at 10 a.m. ET. Barofsky, Geithner, former Treasury Secretary Paulson and the lead attorneys for the New York Fed and AIG are all slated to testify.