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.