At NYFed, Geithner was told of benefit to banks in AIG bailout


By Hugh Son
Bloomberg News
Monday, January 25, 2010

NEW YORK -- Timothy F. Geithner, who has denied that the financial condition of American International Group Inc.'s bank counterparties was a consideration in structuring the insurer's bailout, was told by a senior colleague that the rescue was a way to remove "uncertainty" for the firms.

Buying mortgage-linked assets from banks was better "from a financial-stability perspective" than other plans to shield AIG from losses on contracts guaranteeing the bonds, Margaret McConnell, then a Federal Reserve Bank of New York vice president, wrote in an e-mail to Geithner on Oct. 22, 2008. Geithner, now Treasury secretary, led the New York Fed at the time of AIG's rescue and McConnell's e-mail.

The special inspector general of Treasury's Troubled Asset Relief Program wrote in a 2009 report that Geithner said the New York Fed didn't weigh the financial status of banks, including Goldman Sachs Group Inc., when deciding to fully reimburse them for $62.1 billion of devalued assets. U.S. Rep. Darrell Issa, the ranking member of the House oversight panel that called Geithner to testify this week, has described the rescue of New York-based AIG as a "backdoor bailout" of banks.

The New York Fed weighed two other options for stanching losses tied to AIG's credit-default swaps in the weeks after the September 2008 rescue, the inspector general, Neil Barofsky, said in the Nov. 17, 2009, report. One included asking counterparties to cancel their swaps and selling the underlying assets for an investment in a vehicle that would assume ownership of the securities. Another was for a Fed-backed vehicle to take over AIG's responsibility of backing the assets.

The first alternative was deemed too time-consuming and the second made regulators uncomfortable because it would give them "long-term credit relationships with supervised institutions," Barofsky said in the report.

Paying banks through a Fed-funded facility known as Maiden Lane III made sense, McConnell wrote in the Oct. 22 e-mail to Geithner, "because it seems to remove considerably more uncertainty for the firms and arguably for the system."

Andrew Williams, a Treasury Department spokesman, said "the creation of Maiden Lane III to help stabilize AIG and the financial markets was prudent, and it is highly likely that the Fed will get back every dollar it committed to Maiden Lane III with interest and, quite likely, a profit."

Jack Gutt, spokesman for the New York Fed, declined to comment on the e- mail.

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, according to a New York Fed report.

Geithner agreed to testify at a House oversight panel hearing scheduled for Jan. 27 after e-mails released by Issa indicated the New York Fed asked AIG to limit what the public knew about the bank payments.

"It has become all too clear that the New York Fed was more interested in protecting the interests of Wall Street instead of Main Street," said Issa, a California Republican, in a statement.

The McConnell e-mail obtained by Bloomberg News is part of 250,000 pages of documents the New York Fed provided to the House Oversight and Government Reform Committee after the panel issued a subpoena this month asking for e-mails, phone logs, and other documents tied to AIG's rescue, which swelled to $182.3 billion.

"Questions have been raised as to whether the Federal Reserve intentionally structured the AIG counterparty payments to benefit AIG's counterparties," Barofsky wrote. "Geithner and the New York Fed's general counsel deny that this was a relevant consideration for the AIG transactions."

Barofsky, who agreed to testify this week, wrote in November that the rescue "provided AIG's counterparties with tens of billions of dollars they likely would have not otherwise received."

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