WTF? Fed Demands “Special Security Procedures” for AIG Details From SEC

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?

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  1. Trainwreck

    How long have modern derivatives lived? And how long has America been addicted to credit? And at one point with that relationship blow up?

    The bubble burst in the credit industry pales in comparison to the looming potential burst of the ginormous credit bubble that has been in place in perpetuity for the past 30 years.

    That is why they are using smoke and mirrors at the Fed. That is why Bernanke is the Wizard of Oz telling the American people to pay no attention to the man behind the curtain. That is why they would have to gall to request national security status to hide the ball.

    You crack open the books of the fed and our national banks you may very well discover where all the losses are and how far back in time they truly go. We already know pension funds, mutual funds, money market funds, and other obligations have been stuffed with this bad crap. We just don’t know have fully impacted that fecal matter truly is.

  2. bob

    If they were really that concerned about the security of the files they would have requested that they be kept in Cheney’s man sized safe.

    This is akin to Cheney claiming that he was not part of the executive branch in order to shield himself and his files from discovery.

    How many security clearances at the NY fed are there? At AIG?

    Agree, this does not make sense.

  3. Ronald

    Officers within the various named parties may have made public statements to the press, or testimony under oath that is contradicted by this release either one or both possibilities are on the table.

  4. nowhereman

    Transparency —-> Bernanke ——-> Liar

    OK, so now let’s see how his second term confirmation plays out. Obama and his administration have absolutely no clue. The damage this does to the President’s credibility is beyond repair, and yet they persist. They march on totally oblivious to reality. I am so flabbergasted my head is about to explode.

  5. Hugh

    It is called a cover up. Because of the timing those most likely tarred by the file are Geithner, Bernanke, and Paulson in that order.

  6. Trainwreck

    How far down the rabbit hole are you prepared to go?

    As Nietzsche said, “Battle not with monsters, lest ye become a monster, and if you gaze into the abyss, the abyss gazes also into you.”

    Yes fight the corrupt money controlling system, but be prepared for the financial black hole that we must repair.

    How to do that, I don’t think anyone knows. But I think the current system needs to fail before any honest system can be put in place.

    1. John E. Titus, Esq.

      Agreed. If you’re smart and even moderately prepared, you’ll do great when this system fails (and I think it’s soon; the Bernanke Show has “bank holiday” written all over it). It’s the pods–the 90+%–who’ll have the shot glass run off their eye.

  7. Independent Accountant

    Attempts at concealment are admissible “res gestae” as showing conciousness of guilt. Indict all responsible parties, particularly those at the SEC that permitted this. The SEC is as hopeless as the Fed.

  8. gordon

    I can’t pretend to analyse the situation in the detail that Yves Smith can do, but this reminds me strongly of a post on this blog on Dec. 13 ’09: “Drug Money Saved Banks in Global Crisis?”

    During the debates about nationalisation which were all over the blogs at the end of 2008/ early 2009, I speculated that a powerful reason for not nationalising insolvent banks was that Govts. were frightened of what they would find. Criminal money laundering? Tax evasion;? Terrorist money? And maybe some of the Govts. own black funds, devoted to God knows what purposes.

    Remember the Bank of Credit and Commerce International?

  9. benf

    This means Paulson probably ordered it be kept secret. The fed does not have the authority to classify stuff as national security, so Geithner may not actually have knowledge of this document, as he claims.

    The head of the Treasury can classify files as a national security issue.

    1. Yves Smith Post author


      It was the Fed, not the Treasury, that made the request of the SEC, and it was the SEC, not the Fed, that pondered treating the AIG materials as if they were state secrets. I infer the SEC has only garden variety confidential vs. national security material. So if the Fed lobbied for extra-special confidentiality, that appears to have been a novel request for the SEC, which again illustrates how bizarre this all is.

  10. bena gyerek

    i think it’s probably a case of too much paranoia – both at the fed and on this thread. i suspect the fed just overreacted in a situation where they were under duress and did not fully appreciate how compromising their confidentiality request would look later on.

    i once worked on a transaction where the client was keen for political reasons for it not to be known they were doing credit derivatives. the client just wanted to avoid embarrassing questions, even though they weren’t doing anything outright wrong. so i rather naively requested euroclear to assign a confidential isin to the transaction, and got a european stock exchange to provide a confidential listing (surely an oxymoron, i hear you cry!). it was only well after the fact that i realised how compromising these requests looked.

    1. Yves Smith Post author


      The Fed, through AIG, pushed the SEC to keep the details secret well after the crisis was past, in May 2009. Last week, it reiterated bogus reasons for keeping the details secret (as in the info needed to be kept from traders to maximize values for Maiden Lane III) via a long and very defensive statement on its website, when we demonstrated that the identity of nearly all of the individual transactions was already in the public domain.

      If it doesn’t have something to hide, the Fed is certainly doing a very good impersonation of an organization that has something to hide on this issue.

  11. Francois T

    When I saw this Reuters piece, my 1st reaction was…lol!

    National Security level of secrecy after the fact?

    Give me a break! This has to be a paranoid overreaction.

    But then, it occurred to me that we haven’t seen these documents in toto.

    Which begs the question: What’s really in there? Is there some sort of embarrassing set of facts that some people are very keen to keep out of the public view?

    Inquiring minds want to know.

  12. Attitude_Check

    Yves, I think you may be reading too much in here. It appears to me that the Fed is releasing the documents to the SEC while it is simultaneously working the courts, and the rest of the administration to stop public release. They are legitimately concerned that things like this may leak, and so want very tight control while they work to suppress this from the public.

    The SEC then offered to store it in a classified safe which has very few people that can access it, un til the releasability status is determined, thus assuring that a release through a leak is avoided.

    The Fed must know what has been released (leaked?) to date, an this level of sensitivity implies there is something more here. All good reasons why the Fed needs a full audit.

  13. Rin Tin Tin

    At risk of being accused of tinfoilery, it is well-known that AIG has a long history with military and intelligence roles dating back to WWII. A while back when I was looking at the company’s boards and relationships, I came across quite a few military types in the airplane-airport insurance line. Wouldn’t surprise me if the business relationship hasn’t been there all along and they’d rather the public not know about it. Course, there’s also the AIG-NY Fed relationship which could also be embarrassing. Embarrassing=national security threat.

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