naked capitalism

Francios T. sent the link to the Reuters story describing the fact that the Fed demanded unusual security procedures before supplying “a critical bailout related document” and the the SEC said if it agreed with the request to keep it confidential, it would store it where national security related files are kept.

Sports fans, this request can point to only one of two conclusions. Either the folks at the Fed are suffering from a massive case of grandiosity, or something very incriminating is in that file. There is simply no bailout-related information that legitimately warrants that level of security treatment AFTER THE FACT (even in the very unlikely event AIG officials possessed information related to terrorist financial networks, which is legitimately limited to parties with high-level security clearances, I can’t imagine that it would be the sort of thing that would also be subject to disclosure in SEC filings, and hence would be subject to back and forth among the Fed, AIG, and the SEC).

And there is no reason to think this information is this deserving of such heroic efforts. Apparently, the information includes transaction level detail like CUSIPs. As we indicated in our post last Friday, most of this information is already in the public domain (from the transaction information we have located, adding the CUSIPs is pretty easy).

From Reuters:

The request to keep the details secret were made by the New York Federal Reserve — a regulator that helped orchestrate the bailout — and by the giant insurer itself, according to the emails.

The emails from early last year reveal that officials at the New York Fed were only comfortable with AIG submitting a critical bailout-related document to the U.S. Securities and Exchange Commission after getting assurances from the regulatory agency that “special security procedures” would be used to handle the document.

The SEC, according to an email sent by a New York Fed lawyer on January 13, 2009, agreed to limit the number of SEC employees who would review the document to just two and keep the document locked in a safe while the SEC considered AIG’s confidentiality request.

The SEC had also agreed that if it determined the document should not be made public, it would be stored “in a special area where national security related files are kept,” the lawyer wrote.

In another email, a New York Fed official said the SEC suggested in late December 2008, that AIG file the document under seal and then apply to the regulatory agency for so-called confidential treatment, if central bankers wanted to stop the information from becoming public….

“The New York Fed was orchestrating what can only be characterized as an extreme effort to ensure that details of the counterparty deal stayed secret,” Rep. Darrell Issa from California, the ranking Republican on the House Oversight Committee, said through a spokesman. “More and more it looks as if they would’ve kept the details of the deal secret indefinitely, it they could have.”

In March, some of the secrecy surrounding the AIG bailout began to fall away when the insurer, under pressure from Congress and the SEC, agreed to publicly name the 16 banks that got money in the rescue package and how much each received.

But AIG, largely at the prodding of the New York Fed, refused to make public all of the information in the controversial document, officially called “Schedule A — List of Derivative Transactions,” according to the emails turned over by the central bank to Capitol Hill. AIG continued to seek confidential treatment from the SEC for the redacted portions of the five-page filing.

Last May, the SEC did grant AIG’s request for confidential treatment for the remaining redacted portions of the Schedule A filing. The redacted parts include the CUSIP, or trading ID, number for each security on which AIG wrote a CDS contract, as well as the face value of each individual security that AIG had insured against default.

Yves here. What can the Fed be so desperate to hide? The relationship among the counterparties? We were surprised to see how many banks had acquired super-senior CDOs from other banks, and not just EuroBanks, where that was not unheard of (Basel II rules allowed a bank that had hedged an AAA instrument with a guarantee from an AAA counterparty as requiring no capital, so for them, buying AAA CDOs when the cost of the hedge was cheaper than the yield on the instrument, aka a “negative basis trade” looked sensible on paper, even though these trades blew up spectacularly). Or is it anxious not to have its valuations questioned? Is there some other reason readers can fathom?