bailout aig federal reserve oversight

Congress Can't Get the Fed to Reveal Much
congress geithner secrecy

Secret Banking Cabal Emerges From AIG Shadows

When even the mainstream business press gets annoyed with the bankers sucking up so much easy money, then you better be getting yourself ready to demand retribution, even a wholesale change to a new economy, one based on geonomics. We trim this 2010 article from Bloomberg (yes, Bloomberg) of Jan 29.

by David Reilly, Bloomberg

After the congressional hearing into the bailout of American International Group, you have to wonder. Wednesdayís hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials. Weíre talking about the Federal Reserve Bank of New York, whose role as the most influential part of the federal-reserve system deserves further congressional scrutiny.

The New York Fed is in the hot seat for its decision in November 2008 to buy out, for about $30 billion, insurance contracts AIG sold on toxic debt securities to banks, including Goldman Sachs Group Inc., Merrill Lynch & Co., Societe Generale, and Deutsche Bank AG, among others. That decision, critics say, amounted to a back-door bailout for the banks, which received 100 cents on the dollar for contracts that would have been worth far less had AIG been allowed to fail.

That move came a few weeks after the Federal Reserve and Treasury Department propped up AIG in the wake of Lehman Brothers Holdings Inc.ís own mid-September bankruptcy filing.

Treasury Secretary Timothy Geithner was head of the New York Fed at the time of the AIG moves. He maintained Wednesday that the New York bank had to buy the insurance contracts, known as credit default swaps, to keep AIG from failing, which would have threatened the financial system.

The hearing before the House Committee on Oversight and Government Reform also focused on what many in Congress believe was the New York Fedís subsequent attempt to cover up buyout details and who benefited.

The hearing revealed some of the inner workings of the New York Fed and the outsized role it plays in banking. The New York Fed, even though a quasi-governmental institution, is not subject to citizen intrusions such as freedom of information requests, unlike the Federal Reserve.

This impenetrability comes in handy since the bank is the preferred vehicle for many of the Fedís bailout programs. Itís as though the New York Fed was a black-ops outfit for the nationís central bank.

The New York Fed is one of 12 Federal Reserve Banks that operate under the supervision of the Federal Reserveís board of governors, chaired by Ben Bernanke. Member-bank presidents are appointed by nine-member boards, who themselves are appointed largely by other bankers. As Representative Marcy Kaptur told Geithner at the hearing: ďA lot of people think that the president of the New York Fed works for the US government. But in fact you work for the private banks that elected you.Ē

Letís take Geithner at his word that a failure to resolve the insurerís default swaps would have led to financial Armageddon. Given the stakes, you might think Geithner would have coordinated actions with then-Treasury Secretary Henry Paulson. Yet Paulson testified that he wasnít in the loop. Fed Chairman Bernanke also wasnít involved. You have to wonder then who really was in charge of our nationís financial future.

Questions about the New York Fedís accountability grew after Geithner on Nov. 24, 2008, was named by then-President-elect Barack Obama to be Treasury Secretary. Geither said he recused himself from the bankís day-to-day activities, even though he never actually signed a formal letter of recusal.

That left issues related to disclosures about the deal in the hands of the bankís lawyers and staff, rather than a top executive. Those staffers didnít want details of the swaps purchase to become public. New York Fed staff and outside lawyers from Davis Polk & Wardell edited AIG communications to investors and intervened with the Securities and Exchange Commission to shield details about the buyout transactions.

That the New York Fed, a quasi-governmental body, was able to push around the SEC, an executive-branch agency, deserves a congressional hearing all by itself.

When it became clear information would be disclosed, New York Fed legal staffer James Bergin e-mailed colleagues saying: ďWe need to focus our efforts on explaining the story as best we can. There were too many people involved in the deals -- too many counterparties, too many lawyers and advisors, too many people from AIG -- to keep a determined Congress from the information.Ē So. A staffer at a body with little public accountability and that exists to serve bankers is lamenting its inability to keep Congress in the dark.

Committee Chairman Edolphus Towns noted during the hearing that the bank initially refused to disclose even the names of other banks that benefited from its actions. That had an effect on the credibility of the Federal Reserve, and it called into question the Fedís penchant for secrecy.

When unelected and unaccountable agencies pick banking winners while trying to end-run Congress, even as taxpayers are forced to lend, spend, and guarantee about $8 trillion to prop up the financial system, our collective blood should boil.

Also see:

Dancing with the Czars

Records set in foreclosures, prices, and gifts to Wall St

How Did Economists Get It So Wrong?

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