GC Defends Bank as Lawmakers Call AIG Bailout 'Biggest Theft in History'
Sue Reisinger, Corporate Counsel, January 28, 2010
The general counsel of the Federal Reserve Bank of New York stood by his bank's actions during a wild congressional hearing Wednesday that saw one lawmaker suggest that the $180 billion bailout of American International Group Inc. may be "the largest theft in history."
General counsel Thomas Baxter Jr. staunchly defended his bank against such accusations during the combative hearing before the House Committee on Oversight and Government Reform. But not before:
• The special inspector general of the bailout program told the panel he is investigating whether the New York Fed withheld key documents from his investigators;
• Committee Chairman Edolphus Towns, D-N.Y., said the U.S. taxpayers "were propping up the hollow shell of AIG by stuffing it with money, and the rest of Wall Street came by and looted the corpse";
• Rep. Darrell Issa, R-Calif., announced he "had a hard time believing" Treasury Secretary Timothy Geithner's account of his involvement in the AIG deal, when Geithner was president of the New York Fed in 2008;
• Several panel members attacked Geithner's "weak" excuses, and Rep. John Mica, R-Fla., suggested that Geithner should resign his Treasury post. A weary-looking Geithner said he'd leave if President Obama asks him to.
Both Democrats and Republicans on the committee took issue with how the Fed paid AIG counterparties nearly 100 cents on the dollar for credit default swaps, at a time when other companies were negotiating much lower percentages. Baxter, the GC, explained that the Fed acted during a "frenetic" time of global financial instability. He said AIG faced a looming deadline to either rid itself of the swaps or see its credit rating drop -- which would put AIG "on the brink of bankruptcy."
But Neil Barofsky, special inspector general for the Troubled Asset Relief Program, questioned the "tone and the effort" of the bank's negotiations with the counterparties, such as financial giant Goldman Sachs Group Inc. He said Geithner delegated the negotiations to underlings.
Barofsky wondered why Geithner or then-Treasury Secretary Henry Paulson didn't get on the phone or meet in person with bank chief executives to negotiate a better deal. Paulson testified that he wasn't involved in the decision to pay the counterparties, and Geithner said he was proud of how he handled the situation in such a crisis.
The committee also hammered Geithner and Baxter for their efforts to keep secret the details of the payments, including the names of the counterparties and the amount of the payments. Both men insisted the secrecy was an effort to protect AIG and the taxpayers' interests, and not to hide information from the public.
Towns noted that AIG has since released the counterparty names and the amounts paid, and nothing bad has happened to AIG or the taxpayers. The secrecy leads to distrust, and the distrust leads to anger among the American people, Towns warned.
Issa repeated an earlier accusation that the secrecy was an attempt to give a "backdoor bailout" to favored institutions without anyone else knowing. Geithner denied taking part in any "cover-up."
Baxter did not say who at the Fed asked his legal department to work with AIG to keep the details out of the company's public filings with the Securities and Exchange Commission. He said the Fed's editing of the AIG filing was for the sake of accuracy.
Both Baxter and Geithner tried to redirect the committee's attention to financial reform measures in hopes of avoiding such crises in the future. Other witnesses included Elias Habayeb, former chief financial officer at AIG, and Stephen Friedman, ex-chairman of the New York Fed's board of directors.
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