Still not clear on why I don't trust the Federal Reserve to be the systemic risk regulator? Want a great example of a conflict of interest where it urged a firm to withhold information to ensure its bailout go smoothly? Bloomberg provides just that today. It turns out the New York Fed, then under current Treasury Secretary Tim Geithner, may have told AIG to withhold details about the banks that would benefit from its bailout due to its swap agreements. This is ugly stuff.
AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008. The e-mails were obtained by Representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee.
The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps, which were contracts tied to subprime home loans, threatened to swamp the insurer weeks after its taxpayer-funded rescue. The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the swaps, prompting lawmakers to call the AIG rescue a "backdoor bailout" of financial firms.
"It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information," said Issa, a California Republican. Taxpayers "deserve full and complete disclosure under our nation's securities laws, not the withholding of politically inconvenient information." President Barack Obama selected Geithner as Treasury secretary, a post he took last year.
One annoying thing about the Fed is that it's perfectly okay with a lack of transparency, or even secrecy, in order to accomplish its goals. It has a sort of the-ends-justify-the-means attitude. This is a precise example of that. Even though regulators, Congress, and the Treasury should have known these details, the Fed must have thought the bailout would run more smoothly without mucking it up with the facts about where the money would ultimately be going.
With news like this, maybe I'm wrong about Geithner: Obama might want to replace him sooner than later after all. One can only hope that his Treasury strives for more transparency than his Fed.