U.S. Probe of AIG Payouts Intensifies
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The questions about "who knew what when" during the government bailout of AIG (AIG
) have gone back and forth for weeks. Treasury Secretary Geithner has been accused of knowing the details of disclosures regarding how and why AIG made good on 100% of its obligations to counterparties for which it guaranteed the value of mortgage-backed securities. Geithner, who was the head of the New York Fed at the time, has denied knowing intimate details of the disclosure decisions.Neil Barofsky, the inspector general for the $700 billion TARP, has begun the process of reviewing the Fed's role in the AIG bailout. He told Congress that he will look at
"misconduct relating to the disclosure or lack thereof" by the Fed officials who were aware of AIG payouts. No one has completely answered the question of why AIG paid Goldman Sachs (GS
) and other counterparties 100 cents on the dollar for insured MBS, instead of getting the government to help negotiate those payments to lower levels. One reason cited for the full payments is that the financial firms that owed the money might have suffered great damage to their balance sheets if they were forced to take less money -- this could have increased the risk of a systemic failure of the credit system.
The investigation turns on whether the New York Fed actively encouraged AIG to withhold details of its payments to counterparties. The total amount of the payouts was just over $62 billion. The total cost to taxpayers of the AIG bailout was $182.3 billion.
The question of whether the New York Fed should have encouraged AIG to be quiet about some of the details of its payments to banks that had MBS insurance from AIG is a tricky one. It addresses the issue of whether taxpayers deserve a full accounting of what happened to the TARP money, or whether the interests of the credit markets were best served by keeping some information confidential. A complete rendering of the relationship of AIG's relationship with parties for which it insured MBS might have cause concern about the breadth of the potential that the mortgage bands could have destroyed or greatly weakened some Wall Street firms.
The government keeps some secrets in a number of its department like Defense and the CIA. Whether sensitive and confidential information about the details of the TARP bailouts should be kept secret is a debate that will go on well after Barofsky's probe is done.