U.S. Treasury Investigator Says French Regulator Was Open to AIG Talks

January 27, 2010

An overseer for the U.S. bailout program said Tuesday that France’s banking regulator was open to further negotiations over possible concessions on payments from bailed out insurer AIG, according to prepared congressional testimony.

Neil Barofsky, the special inspector general for the U.S. Treasury’s Troubled Asset Relief Program, said in prepared remarks to the U.S. House Oversight and Government Reform Committee, that the French regulator told him in the past two months “that they did not ‘slam the door’ to such continued discussions.”

The panel is holding a hearing Wednesday that will examine, among other things, decisions made by the New York Federal Reserve Bank under Timothy Geithner’s stewardship, to pay banks $62.1 billion to retire credit default swaps at par value. Geithner, who is now Treasury Secretary, in November 2008 made the decision to pay 100 cents on the dollar and end negotiations for concessions from the banks, which included Societe Generale and Calyon.

In an earlier audit of the AIG payments to counterparties published in November 2009, Barofsky said New York Fed officials had told his office that the French regulator had refused to allow the two banks to make concessions.

In addition, Barofsky said that the New York Fed’s warnings about the dangers of disclosing sensitive information about the bank counterparties “simply does not withstand scrutiny.”

After pressure from the public and Congress, AIG disclosed the identities of the counterparties and gross amounts paid in March 2009. “Notwithstanding the Federal Reserve’s warnings, the sky did not fall; there is no indication that AIG’s disclosure undermined the stability of AIG or the market or damaged legitimate interests of the counterparties.”

The TARP auditor also said the structure of the Fed’s investment vehicle for the securities, which has been criticized as providing a “back-door bailout” for banks, was by design intended to allow AIG to funnel billions of dollars to banks, even though the primary intent was to shore up AIG’s liquidity to avoid further rating downgrades.

In earlier written testimony provided to the committee, the New York Fed’s general counsel, Thomas Baxter, said the Fed supported AIG’s requests to the Securities and Exchange Commission to keep some details about the transactions confidential, saying this would help preserve the value of taxpayer assets.

Baxter said that had details on individual securities held by Maiden Lane III been divulged to market participants, it could “undercut the ability of Maiden Lane III to sell those assets for their highest value, to the detriment of taxpayers.”

Baxter also said the New York Fed had no bargaining power over counterparty banks because the government bailout had eliminated the threat of bankruptcy for AIG.

(Reporting by David Lawder; editing by Carol Bishopric)

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