NY Fed-AIG Bank Swap Flap Causing Trouble

Yesterday, I noted the Bloomberg story reporting that the New York Federal Reserve appears to have prevented AIG from fully disclosing the magnitude of its bailout that would go to pay bank swap counterparties. Washington has taken notice. The top Republican on the House Financial Services Committee, Spencer Bachus has sent a letter (.pdf) to committee chair Barney Frank demanding an inquiry. This scandal could have all sorts of repercussions in Washington.

First, here's part of what Bachus wrote, after outlining the concern:

For all these reasons, our Committee has a duty to convene a Full Committee hearing in order to determine the facts surrounding AIG's bailout. There is no more urgent business before the Committee and this hearing should be given the highest priority.

Given that the House is finished (for now) with financial regulation, I kind of agree with Bachus. And what might such an inquiry find out?*

First, and foremost, that the Fed hates transparency. Of course, that's no surprise to anyone who follows the central bank. But this might fuel the fire for Rep. Ron Paul's quest to reform the Fed. Republicans are -- rightly I think -- very angry that this kind of information was withheld from Congress when distributing taxpayer money to bailout a firm. I don't think it's particularly outlandish that Washington wants to understand how taxpayer dollars are spent. And, to me, it seems highly unethical to urge a firm to purposely withhold that information when they were planning on disclosing it -- which is what it appears the NY Fed did.

From a people perspective, this finding could also matter. Fed chairman Ben Bernanke hasn't been re-confirmed yet. While it has been largely expected that he would be, this news might make that confirmation process a little more difficult. Republicans will certainly question him about the NY Fed's decision to withhold that information. If it causes a several Democrats to also doubt Bernanke's ability to lead a reasonably transparent Federal Reserve, then the pendulum could sway away from re-confirmation.

It also reaches into the Treasury, with Geithner in the spotlight. He was the President of the New York Fed during the AIG negotiations. That means the buck stopped with him. We're already hearing calls for his firing following yesterday's news, and they may grow louder. President Obama advertised Geithner as a Treasury Secretary that didn't cater to big Wall Street banks. This news paints quite a different picture.

Finally, the scandal could effect financial regulation. Republicans probably wouldn't have been on board anyway, but you might see some stricter controls over the Federal Reserve added in now. There was already an amendment requiring a Fed audit, but some more ambitious language could now find its way into the bill's final version if enough Democrats are also outraged with the NY Fed's actions.

* Note: Turns out Barney Frank also finds the situation "troubling" and supports a hearing. This should be fun to watch.