New York Fed ‘Very Sensitive’ on AIG, E-Mail Says (Update2)
January 19, 2010, 06:54 PM EST
(Adds gain in Maiden Lane portfolio in the penultimate paragraph.)
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‘Letter of the Law’
New York Fed President William Dudley told PBS last week that the regulator was transparent in its handling of AIG, which was rescued in September 2008 in a bailout that swelled to $182.3 billion.
“We have acted completely in the spirit of the law, letter of the law in everything that we’ve done,” Dudley said, according to a transcript of the interview.
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By Hugh Son
Jan. 19 (Bloomberg) -- The Federal Reserve Bank of New York was “very sensitive” about explaining that bailout payments fully reimbursed American International Group Inc.’s trading partners for bonds tied to subprime mortgages, according to an e-mail from one of the insurer’s executives to another.
Elias Habayeb, former chief financial officer of the AIG division with the unit that sold bond protection to banks, wrote in a November 2008 e-mail to company executives that he wanted to clear up “a lot of confusion” about the price that the New York Fed would pay to retire $62.1 billion in derivatives.
The New York Fed, run by Timothy F. Geithner when the company was rescued in 2008, faces pressure to explain why banks including Goldman Sachs Group Inc. and Societe Generale SA were made whole on AIG guarantees and why the regulator asked the insurer to withhold information about the payments from filings. Geithner, now Treasury secretary, agreed to testify Jan. 27 before a House hearing. The New York Fed has been ordered to give Congress documents related to the bailout by today.
‘Very Helpful’
Nicholas Ashooh, senior vice president in charge of New York-based AIG’s communications at the time, replied to Habayeb in a Nov. 11, 2008, e-mail that his proposed explanation “would be very helpful, but I understand that the Fed is very sensitive and we have to clear it with them.”
AIG said in a draft of a filing in December 2008 that it paid banks “100 percent of the par value” for securities tied to the swaps. The New York Fed crossed out that wording in the draft, according to e-mails obtained by Representative Darrell Issa, a California Republican and ranking member of the House Oversight and Government Reform Committee. AIG excluded the language when the filing was made public Dec. 24, 2008. Issa has called the payments to banks a “backdoor bailout” by the U.S.
‘No Effort to Mislead’
Thomas Baxter, general counsel of the New York Fed, said this month in a statement that “all information was in fact disclosed that was required to be disclosed by the company, showing that counterparties received par value. There was no effort to mislead the public.”
The Dec. 2 and Dec. 24 AIG regulatory filings in 2008 included passages with total amounts of bonds purchased and the source of funding to pay the banks about $62 billion, including the forfeiture of collateral postings. The references were less clear than the language that was omitted, said Janet Tavakoli, founder of Chicago-based Tavakoli Structured Finance Inc., a financial consulting firm.
“The average person wouldn’t know what this paragraph meant,” Tavakoli said.
Geithner, who became Treasury secretary in January of last year, said last week in a CNBC interview that he wasn’t involved in decisions regarding AIG disclosures and that “the Fed did disclose all that information subsequently.”
Mark Herr, a spokesman for AIG, declined to comment. Attempts to reach Habayeb and Ashooh weren’t immediately successful. Deborah Kilroe, a spokeswoman for the New York Fed, declined to comment.
‘Letter of the Law’
New York Fed President William Dudley told PBS last week that the regulator was transparent in its handling of AIG, which was rescued in September 2008 in a bailout that swelled to $182.3 billion.
“We have acted completely in the spirit of the law, letter of the law in everything that we’ve done,” Dudley said, according to a transcript of the interview.
The New York Fed asked Habayeb to “stand down” from negotiating with counterparties, according to an Oct. 31, 2008, e-mail he wrote to AIG CFO David Herzog. Herzog replied that AIG should “get back with Goldman” about the change in plans.
Before the New York Fed took over the talks, AIG tried to persuade banks to accept so-called haircuts of as much as 40 cents on the dollar, according to people familiar with the matter. The regulator made “limited efforts” to secure discounts over two days in November 2008, according to a report from Neil Barofsky, the special inspector charged with policing the U.S. Troubled Asset Relief Program.
Barofsky, Habayeb and Baxter are scheduled to testify at the Jan. 27 hearing. Henry Paulson, who was Treasury secretary at the time of AIG’s rescue, was asked to appear, said Representative Edolphus Towns, the New York Democrat who is chairman of the Oversight Committee, in a statement last week.
‘Concerted Effort’
“There are two crucial questions that need to be answered,” Issa said in a statement. “First, did all parties involved in this deal use every avenue available to protect the American taxpayers? Second, why was there such a concerted effort by the New York Fed to pressure AIG to not disclose details of the counterparty deal at the earliest opportunity possible.”
E-mails obtained by Issa show that New York Fed attorneys and the regulator’s outside lawyers had discussions with AIG about asking permission from the Securities and Exchange Commission to omit names of bonds that the insurer guaranteed for banks.
‘Special Procedures’
A Jan. 13, 2009, e-mail to the insurer from Diego Rotsztain, then a lawyer at Davis Polk & Wardwell LLP, the firm hired by the New York Fed, said that “AIG should be getting a call from the SEC to discuss the special procedures to be followed in connection with the submission” of a request for confidential treatment.
On Jan. 14, 2009, an AIG regulatory filing excluded a list of counterparties and collateral postings. Data from a so-called Schedule A have “been omitted and filed separately with the Securities and Exchange Commission,” AIG said in the filing. “Confidential Treatment has been requested for the omitted portions.”
AIG e-mailed the New York Fed in March 2009 a draft of a letter to the SEC saying that it intended to withdraw its request for confidential treatment for documents tied to the bank payments because some of the information had been reported by the media. The SEC granted confidential treatment in May of 2009. Reuters reported on those e-mails on Jan. 17 of this year.
The New York Fed may recoup its loan to Maiden Lane III, the vehicle that obtained CDOs from the banks after paying to cancel the swaps, Barofsky has said. According to a New York Fed report, the value of securities and cash held in Maiden Lane III climbed 4.5 percent to $23.5 billion in the three months ended Sept. 30.
The New York Fed has said AIG securities lawyers had the final decision about what to include in regulatory filings. In March 2009 Fed Vice Chairman Donald Kohn testified before Congress that disclosure of the counterparties’ names would harm the bailed-out insurer’s ability to do business. AIG named the banks later that month under pressure from lawmakers.
--Editors: Dan Kraut, Gregory Mott
To contact the reporter on this story: Hugh Son in New York at +1-212-617-7872 or hson1@bloomberg.net
To contact the editors responsible for this story: Dan Kraut at +1-212-617-2432 or dkraut2@bloomberg.net
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