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>>Fed's Kohn Refuses To Share AIG Counterparties 03/05 10:50 AM
WASHINGTON (Dow Jones)--U.S. lawmakers sharply criticized the Federal Reserve for failing to share information about the government's rescue of American International Group Inc. (AIG:$0.376,0$-0.054,0-12.56%) , calling the firm a "lost cause" and warning that future rescue funds could depend on the Fed's cooperation.
"You will get the biggest 'no' you ever got. I will hold the bill, I will do anything possible to stop you from wasting the taxpayers money on a lost cause," Sen. Jim Bunning, R-Ky., said in a Senate Banking Committee hearing Thursday.
Bunning's comments came in a series of increasingly fiery exchanges between lawmakers and Federal Reserve Vice Chairman Donald Kohn. Despite repeated requests from senators for the Fed to disclose the counterparties who have benefited from the government's bailout of AIG, Kohn said the Fed would not share the information.
"My judgment would be that giving the names would undermine the stability of the company," Kohn said.
That response did not sit well with lawmakers, especially since Kohn acknowledged the need for greater transparency about the Fed and Treasury Department's actions to salvage the embattled firm.
"Public confidence in what we're doing is at stake, it's their money that is being poured into these institutions," Senate Banking Chairman Christopher Dodd, D-Conn., told Kohn. "That kind of an answer undermines that very significantly."
Sen. Richard Shelby, R-Ala., called Kohn's response "very disturbing," and warned Kohn that the Fed and Treasury can stonewall Congress for only so long.
"People want to know what you've done with this money," Shelby said. "Who benefited from this? A lot of the people don't feel the Americcan people have benefited."
Kohn said sharing the names of AIG's counterparties would create uncertainty in the financial markets by undermining the confidentiality agreements that are included in the derivatives and credit-default swap contracts that brought down AIG. More broadly, he repeated the argument offered by Treasury and Fed officials that the government could not let AIG fail.
"The failure of AIG would impose unnecessary and burdensome losses on many individuals, households and businesses, disrupt financial markets, and greatly increase fear and uncertainty about the viability of our financial institutions, " Kohn said.
He said AIG's Financial Products division, the source of much of the company's problems, still has a "very large notional amount" of derivatives contracts that touch a variety of counterparties throughout the financial system. For that reason, Kohn said, "we believe we had no choice if we are to pursue our responsibility for protecting financial stability."
There has been increasing unrest on Capitol Hill about the Fed and U.S. Treasury Department's move earlier this week to once again rework the government's bailout of AIG and give $30 billion of additional capital to the company. As voiced by Dodd, there is a growing concern that AIG is being propped up to protect the counterparties on billions of dollars of credit default swaps and derivatives where investors should expect to take some losses.
"It's not clear who we're rescuing - whether it is whatever remains of AIG or its trading partners," Dodd said. He added that "It's reasonable to ask why holders, who would have received only pennies on the dollar for their credit default swaps absent any government intervention, would expect or deserve payments for what essentially is a bankrupt company."
Shelby called the collapse of AIG a "very disturbing story of malfeasance, incompetence and greed," and said lawmakers need more information from federal officials about their plan for the company.
"There's no transparency here," a frustrated Shelby said.
Kohn said the government's "exit strategy" is for AIG to sell off its non-core businesses to repay the U.S. government for the massive amount of capital and loans the firm has received in recent months. Doing so in the current economic environment will not be easy, he acknowledged.
"These extreme financial and economic conditions have greatly complicated the plans for divestiture of significant parts of the company in order to repay the U.S. government for its previous support," Kohn said.
-By Michael R. Crittenden, Dow Jones Newswires; 202-862-9273; michael.crittenden@dowjones.com |
