Fed E-Mail to Geithner Cites Bank Benefit From AIG (Update1) By Hugh Son
[
link to www.bloomberg.com]
Jan. 25 (Bloomberg) -- Timothy F. Geithner, who has denied that the financial condition of American International Group Inc.’s bank counterparties was a consideration in structuring the insurer’s bailout, was told by a senior colleague that the rescue was a way to remove “uncertainty” for the firms.
Buying mortgage-linked assets from banks was better “from a financial-stability perspective” than other plans to shield AIG from losses on contracts guaranteeing the bonds, Margaret McConnell, then a Federal Reserve Bank of New York vice president, wrote in an e-mail to Geithner on Oct. 22, 2008. Geithner, now Treasury secretary, led the New York Fed at the time of AIG’s rescue and McConnell’s e-mail.
The special inspector general of Treasury’s Troubled Asset Relief Program wrote in a 2009 report that Geithner said the New York Fed didn’t weigh the financial status of banks, including Goldman Sachs Group Inc., when deciding to fully reimburse them for $62.1 billion of devalued assets. U.S. Representative Darrell Issa, the ranking member of the House oversight panel that called Geithner to testify this week, has described the rescue of New York-based AIG as a “backdoor bailout” of banks.
The New York Fed weighed two other options for stanching losses tied to AIG’s credit-default swaps in the weeks after the September 2008 rescue, the inspector general, Neil Barofsky, said in the Nov. 17, 2009, report. One included asking counterparties to cancel their swaps and selling the underlying assets for an investment in a vehicle that would assume ownership of the securities. Another was for a Fed-backed vehicle to take over AIG’s responsibility of backing the assets.
‘Considerably More Uncertainty’
The first alternative was deemed too time-consuming and the second made regulators uncomfortable because it would give them “long-term credit relationships with supervised institutions,” Barofsky said in the report.
Paying banks through a Fed-funded facility known as Maiden Lane III made sense, McConnell wrote in the Oct. 22 e-mail to Geithner, “because it seems to remove considerably more uncertainty for the firms and arguably for the system.”
Andrew Williams, a Treasury Department spokesman, said “the creation of Maiden Lane III to help stabilize AIG and the financial markets was prudent, and it is highly likely that the Fed will get back every dollar it committed to Maiden Lane III with interest and, quite likely, a profit.” Jack Gutt, spokesman for the New York Fed, declined to comment on the e- mail.
‘All Too Clear’
Last Edited by Phennommennonn on 09/27/2011 01:46 PM 
United States
