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Issue November 23, 2009 |
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WASHINGTON—A government report critical of the Federal Reserve Bank of New York's handling of American International Group Inc.'s near-collapse has led a group of congressmen to call for an audit of the entire Federal Reserve System.
The report, “Factors Affecting Efforts to Limit Payments to AIG Counterparties,” criticized the New York Federal Reserve Bank for making “several policy decisions that severely limited its ability to obtain concessions from the counterparties.”
According to the report, which was prepared by Neil Barofsky, special inspector general for the Troubled Asset Relief Program, the bank decided against treating domestic banks that held AIG credit default swaps differently from foreign banks. That led France's bank regulator to refuse to allow two French banks involved to make concessions when negotiating the amount of payment for credit default swap obligations, according to the report.
The bank did not use what the report termed its “considerable leverage” over counterparties that it and the Federal Reserve regulated to force counterparties to accept reduced payments for the instruments, according to the report.
The report also criticized the Federal Reserve for not revealing the identities of AIG's counterparties, which the Federal Reserve argued would undermine AIG and the stability of financial markets.
“After public and congressional pressure, AIG disclosed the identities,” the report noted. “Notwithstanding the Federal Reserve's warnings, the sky did not fall.” Under most circumstances, “whenever government funds are deployed in crisis to support markets or institutions...the public is entitled to know what is being done with government funds.”
In a letter sent last week to the chairmen of the House Financial Services and the Senate Banking, Housing and Urban Affairs committees, the Democratic congressmen, led by Rep. Elijah Cummings, D-Md., cited the report in calling for a congressional investigation of the Federal Reserve System.
Rep. Cummings specifically noted the report's criticism of regulators' unwillingness to negotiate counterparty concessions because the New York Federal Reserve Bank argued that it was acting as an AIG creditor rather than a regulator in the negotiations.
“I believe it is intellectually disingenuous to separate these roles in this case and, frankly, how effective a regulator can the Federal Reserve be if it is unwilling to strive for good public policy through its regulatory powers?” Rep. Cummings wrote.
In addition, two high-ranking Republican congressmen sent a letter last week to Financial Services Committee Chairman Barney Frank, D-Mass., seeking a hearing on the report.
“Without a hearing to fully explore the decisions that led to the bailout of AIG and its counterparties, we are concerned that efforts to extend and expand TARP, as well as legislation currently being considered by (the committee) to codify a permanent bailout authority, will only lead to many of the same mistakes that have cost taxpayers hundreds of billions of dollars,” wrote Reps. Spencer Bachus, R-Ala., and Roy Blunt, R-Mo.
For reprints of this story, please contact Lauren Melesio at 212-210-0707 or email lmelesio@crain.com
