A Bloomberg story today on Neil Barofsky, the head of the Office of the Special Inspector General for the Troubled Asset Relief Program, or SIGTARP, contained this explosive little item (hat tip Tom F):
The TARP watchdog has also criticized Treasury Secretary Timothy F. Geithner in reports and in congressional testimony for his handling of the process by which insurance giant American International Group Inc. was saved from insolvency in 2008, when Geithner was head of the Federal Reserve Bank of New York.
The secrecy that enveloped the deal was unwarranted, Barofsky says, adding that his probe of an alleged New York Fed coverup in the AIG case could result in criminal or civil charges.
In Senate Finance Committee testimony on April 20, Barofsky said SIGTARP would investigate seven AIG-linked mortgage-related securities similar to Abacus 2007-AC1, the instrument underwritten by Goldman Sachs Group Inc. that is at the center of a U.S. Securities and Exchange Commission lawsuit filed against the investment bank on April 16.
Yves here. We’ve been told that Barofsky is political, despite his “take no prisoners” image, and indeed, his report that criticized the New York Fed for paying out 100% of the notional value to holders of AIG credit default swaps bore that out when it bizarrely exonerated the Fed for its repeated retrades of the AIG funding, which is of greater economic consequence than the failure to negotiate a haircut on the CDS).
In fact, this investigation was first discussed publicly in late January, when SIGTARP made it abundantly clear that is was not prepared to tolerate New York Fed intransigence. As we noted then:
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?
So the real significance of the Bloomberg update today is Barofsky would be unlikely to mention the idea that his investigation could result in charges unless he thought it probably would result in charges.
Another factor favoring this outcome is that Barofsky has the wind in his sails in taking on Fed secrecy. While the audit the Fed movement isn’t getting as much press as Goldman, Greece, and the financial reform bill slugfest, it continues to gain momentum. From a story at Huffington Post by Ryan Grim:
As unusual a coalition as can be crafted in the Senate plans to fight for an amendment to the Wall Street reform bill that would open the Federal Reserve to a serious audit by the Government Accountability Office. Sponsored by Sen. Bernie Sanders (I-Vt.), the language is modeled after an amendment that passed the House, sponsored by Reps. Alan Grayson (D-Fla.) and Ron Paul (R-Texas).
Sanders is joined by four Republicans of varying politics: John McCain (Ariz.), Jim DeMint (S.C.), David Vitter (La.) and Sam Brownback (Kan.). If Democrats in the Senate back the measure, it would have at least 63 votes, but Banking Committee Chairman Chris Dodd (D-Conn.) is opposed and has argued against a broad audit.
Yves here. While there is a large and growing constituency for reining in the Fed, I am not convinced that anyone in the circles of power is willing to take on a Cabinet secretary who most see as sincere but badly captured.