SIGTARP Opens Investigation into NY Fed (and House Oversight Committee Turn Up Heat)

Oh, this is starting to get VERY interesting. L’affaire Fed/AIG is beginning to smell a little like Watergate, where an imperial organization that thinks it writes its own rules (then the Nixon administration, here the Fed) fights tooth and nail to keep certain activities hidden well away (recall, for instance, the Saturday night massacre).

Now of course, the Fed lacks the Nixonian appetite for dirty tricks and open confrontation. And unlike Watergate, where a crime had been committed, here instead we have a mystery: why is the Fed so desperately to hide the details of the AIG bailout, particularly since the bulk of what they say they are trying to sequester is already in the public domain? (And my own little pet peeve is that the focus has been strictly on how much Geithner knew and when. Ahem, what about Bernanke? He and Paulson were virtually joined at the hip during the crisis, and Paulson was heavily involved in all the bailouts. Was the NY Fed a rogue organization of some sort? How can you not say the board of governors is not ultimately responsible for a matter as significant as the AIG rescue?)

As this little scandal brews, the Fed has engaged in the classic error of withholding documents, so that the cover-up may well prove to be a more serious matter than the underlying chicanery (although we rather doubt that; more on that in due course). And remember, the Fed is a regulator! Here we have a body that has as one of its significant duties enforcing rules, both legislation as well as its own regulations, bending them in its dealing with the SEC and refusing to comply with subpoenas. Why should the public trust an organization that puts itself above the rule of law?

Darrell Issa of the House Committee on Oversight and Government Reform has issued a report with a rather ponderous title (“Public Disclosure As A Last Resort:
How the Federal Reserve Fought to Cover Up the Details of the AIG Counterparties Bailout From the American People”) based on the famed 250,000 pages of documents from the New York Fed obtained via subpoena. (I have only a pdf; Google does not show an online version as of this hour). One of the many striking bits is that the Fed is still stonewalling on some of its subpoenas:

The FRBNY’s document production does not include any documents responsive to the Committee’s subpoena prior to September 2008, so the Committee is not currently able to learn when the FRBNY first became aware of potential problems at AIG. In addition, the FRBNY’s document production does not include any documents responsive to the Committee’s subpoena after May of 2009, so the Committee is not currently able to learn the full extent of the FRBNY’s efforts to conceal information about the counterparty payments from this Committee and the public over the last eight months.

Perhaps more significant is that SIGTARP has opened an investigation into the adequacy of the New York Fed’s disclosures. Per the Financial Times:

The New York Federal Reserve is being investigated by Neil Barofsky, the special inspector general overseeing the troubled assets relief programme, over its disclosure of documents relating to the bail-out of AIG and its counterparties…

Mr Barofsky, who is due to appear at the hearing alongside Mr Geithner, says in his testimony that he is pursuing parallel investigations into whether the New York Fed improperly withheld information from the SEC and whether it subsequently withheld documents from his office during an earlier audit of the payments.

It is also worth remembering that SIGTARP has the longest arm of any of the investigators. As the New York Times points out:

There are, in fact, several other panels charged with reviewing and monitoring the bailout. But Mr. Barofsky is the only one backed by federal agents who carry guns and badges and, if necessary, can break the locks off file cabinets.

Back to the Issa report. Many of the revelations are striking. One theme that emerges is how much the Fed took charge at AIG as far as protecting its (institutional) interests were concerned. It begs the question as to who is running AIG. Mind you, we’d love to see the Fed act more like a private equity investor, setting targets of various sorts and monitoring progress against them. But here we see the Fed as extraordinarily intrusive on its own prerogatives. For instance:

On October 31, after AIG had failed to convince its counterparties to wind down the CDS contracts, the FRBNY ordered AIG to “stand down on all discussions with counterparties.”

Yves here. I’d like to hear from readers as to what legal authority the Fed would have to take such a step (I can see “requested” all day. But “ordered’?) The Fed is not a regulator of AIG, and its role as a secured lender does not give it the authority to direct AIG to honor material agreements.

It gets better. The Fed pressured AIG to claim that it would suffer “substantial competitive harm” if details of the CDOs involved in the bailout were revealed. That’s an obvious lie. So we have the Fed pushing a public company to make misrepresentations to the SEC.

We also learn that the Fed decides it’s going to review not just bailout-related SEC filings, but all of AIG’s SEC filings:

On November 17, 2008, AIG was about to make a required filing to disclose a new compensation package for its CFO, David Herzog. AIG shared its draft filing with Davis Polk. The filing disclosed that Herzog was about to rake in millions of dollars in bonuses.71

Less than 40 minutes after receiving the draft filing from AIG, Davis Polk senior partner Marshall Huebner sent a frantic e-mail, entitled “READ ME,” to the FRBNY’s General Counsel, Thomas Baxter: “Sometimes I really do feel like evil gremlins are running this deal somehow. Very bad timing to have this [filing] come out just before the Secretary [Henry Paulson] and the Chairman [Ben Bernanke] go before Waxman …”72 Huebner asked Baxter, “Is there any chance – and maybe it is just too late – to get the Herzog comp package unagreed to? … [W]e could help get the package changed/fixed before it is disclosed.”73 This issue, Huebner said, needed to go “right to [AIG CEO] Ed [Liddy] right now.”74
Apparently, the FRBNY’s coercion succeeded in getting Herzog’s compensation package “unagreed to,” for AIG never made the filing.

Yves here. The report also does a solid job on the parts you’d expect, with some fresh details on the failure to negotiate the AIG credit default swaps, Geithner’s lame efforts to deny that the recuse of AIG was anything other than a backdoor bailout, and a detailed discussion of the major aspects of the cover-up.

The report, however, is not able to say how involved Geithner was in this operation. But given that the NY Fed has clearly refused to comply fully with the subpoena, it isn’t hard to imagine that particularly incriminating documents might have been withheld.

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  1. Doc Holiday

    I know this is OT and out-of-place, but that last post from me on Obama shilling for SIFMA in The State Of The Union Message — pisses me off to no end! We have massive unemployment and failing businesses and a crooked stock market and the reality of a prolonged double-dip recession, with more and more signs of government fraud and collusion — and now, F’ing Obama is going to suggest that Americans give their hard earned money back to the fuckers that lost it for them — without fucking regulating the industry that just gave America a fucking systemic meltdown of Biblical proportions???

    I’m I the only person that thinks this is bullshit for President Obama to be pumping the mutual fund industry and its SIMA curse?? Why not have Buffet ot Bill Gross sit behind him and get rid of the whole dog and pony show effect that Congress is there — just come out like a fascist leader and tell us what we “have” to do, or more correctly, what will be done to us by these fat Cat Bankers that need the president to hype and pump mutual funds ….. barf and spew, this is a gross and foul moment in America’s decay!

    Sorry Yves, et al, but I hope you can recall what happened after Bush pushed his PPA, which I strongly recall, opened the door for hedge fund abuse of pensions and money markets and mutual funds ……. and this is the president that was elected for change?????

    1. alex black

      That’s the funny thing about “Change” as a political stance. It’s a meme that always polls well, as it can mean all things to all people – especially if you add “Hope”, which allows people to assume that the “Change” is exactly what they “Hope” for.

      You didn’t really bite, did you?

  2. alex black

    Geithner and Bernanke have had a year to destroy any incriminating evidence. Whatever was subpoenaed that has not been turned over now exists in the same metaphysical space as the 19-minute gap in the Nixon audiotapes.

    Good criminals know how to hide their tracks.

  3. attempter

    We’re starting to zero in on the thing closest to a de jure criminal act here, this unauthorized laundered loot conveyance to Goldman, perpetrated by Geithner, Bernanke, Paulson.

    Then from there it’s a matter of making the case that the entire bailout is the same such crime, with lobbying for the TARP on their part having been under false pretenses. Same for the monetarist lies about QE – simple looting in the guise of highfalutin ideology.


    Regarding the bonuses, it’s so funny/disgusting how these psychopaths really can’t help themselves. They will literally steal everything in sight unless some kind of external restraint is placed upon them.

    Thus it wasn’t enough for the Fed to orchestrate this looting, but they also have to constantly babysit to make sure no one like Herzog grabs too much as personal loot at any one time.

    Of course, as the excerpt specifies, they didn’t object to Herzog according to any kind of principle, but only on account of the political cosmetics.

    As for the principle, we know looting on a personal level in the form of “bonuses” is the one and only principle of Wall St and now of government.

    For all the talk about capitalism and alleged “innovation”, all of this has never been anything more than the most gutter personal greed on the part of glorified pickpockets and muggers. They should all be dealt with as medieval civilization dealt with these same thieves.

  4. killben

    May be one piece to throw at the senators ..

    No Vote till we know all

    Vote Bernanke down or Else?

    How I wish we had a few elections over the next few days .. that would have done the trick!!

    1. DownSouth

      My thoughts exactly.

      If this investigation goes where I think it’s going, the senators who vote for Bernanke’s confirmation are going to have egg all over their faces.

  5. DownSouth

    More great stuff, Yves.

    It’s amazing to see these guys get caught in their own web. They have become so enmeshed in their religion of greed and selfishness that they believe their money can buy off anyone and everyone.

    It kind of reminds one of the punch line from the 1970s margarine commercial: “Oh, it’s not nice to fool mother nature.”

    For the truth, regardless of what orthodox economists think, is that most people are not rational egoists who can be bought off by money. In fact, in reading Herbert Gintis et al in Moral Sentiments and Material Interests, only a small minority of the population are the selfish P1 maximizers upon which classical economics is constructed.

    So guys like Ferdinand Pecora who respond to non-material rewards—fame, honor, morality, duty, doing the right thing, etc.—always emerge. And their message always resonates with a far greater audience than that of the paladins of greed and selfishness. For reasons little understood, reciprocity and altruism, and not greed, is the “nature” of the vast majority of human beings. The end result is that David does quite frequently slay Goliath.

    I stumbled upon another Pecora-like figure the other day in William Baxter, the DOJ attorney who prosecuted AT&T. Against all odds, and working within an administration that was completely hostile to him, he played a key role (along with Federal District Judge Harold Greene) in bringing the largest and most politically powerful corporation in the world to its knees:

    William Baxter was an eccentric Stanford University Law Professor who had not addressed a court in session for about 20 years. Baxter considered himself an economist although he had no formal training as such. Baxter’s nomination and the disqualification of his superiors created an ironic situation. Baxter had publicly argued that no one company should be able to integrate regulated and unregulated divisions of its business because it could use the “safe” profits from its regulated side to subsidize the price of unregulated products (a cross-subsidy). Reagan’s closest advisors including William French Smith, Edwin Meese (Counselor), Malcolm Baldridge (Commerce Secretary), and Casper Weinberger (Defense Secretary) believed unequivocally that the DOJ’s case against AT&T should be dismissed. This created a situation that if AT&T sympathizers in the Reagan inner circle were going to intervene, they would have to quickly go through
    or around Baxter. Baxter would have none of this and stated before a press conference staged to announce the case, “The case is perfectly sound…and I intend to litigate it to the eyeballs.”

    1. emca

      Woe upon woe, hard, intractable, scurrilous woe, that only there be a Judge Harold Greene for this day. A fish to swim upstream against the drift of published sentiment. To do immeasurable good by just doing one’s job.

      The handling of the AT&T case by Baxter and the adjudication by Greene would be just what the doctor ordered if this case will see the light of blind justice. One will hope that some person of determination, zeal, or ambition would use this as an opportunity to champion public good against the “malefactors of great wealth.”

  6. DoctoRx

    I’m not sure that this is different from Watergate as you suggest. I’m not sure that multiple crimes weren’t committed.

    I suspect, though, that while there was no serious attempt to rationalize that the Watergate breakin was not really wrong, one of the defenses (if it gets that far) of the insiders in this mess is the Iran-Contra diversion defense, and ends justifying the means defense that served Elliot Abrams and Ollie North well then.

  7. Robbie

    Watergate taught us to follow the money. The FRBNY obviously learned the lesson too and is doing its best to prevent that.

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