AIG rescue was 'mishandled'
"Weak negotiating" by the New York Fed may have cost US taxpayers, watchdog says.
Last Modified: 17 Nov 2009 22:01 GMT
The NY Fed was headed at the time of the rescue by US treasury secretary Timothy Geithner [Reuters]

Officials managing the multibillion dollar bailout of American International Group (AIG), bungled the initial rescue of the insurance, possibly overpaying other banks to wind down AIG's business relationships, a government watchdog has said.

The Federal Reserve Bank of New York paid AIG's partner banks face value for securities so they would cancel the insurance-like contracts, easing the firm's liquidity problems when it was on the edge of bankruptcy last year.

But at least one of those business partners would have cancelled the contracts for less, according to a report from Neil Barofsky, the Special Inspector General.

Barofsky said he decided to compile the report after 27 members of Congress asked him to review the basis for the payments and whether they were made in the best interest of taxpayers.

Taxpayer dollars

AIG was initially bailed out for $85bn, but the total rescue package eventually cost more than $180bn.

The report said officials at the NY Fed had mismanaged the negotiations with other banks, removing the threat that AIG would go bankrupt, and had bowed to a demand from French regulators that French banks holding AIG's debt insurance be paid in full.

It criticised both the NY Fed and the US Federal Reserve for failing to use their "considerable leverage" to force AIG's partners to accept less than the full amount for the assets.

The document said the initial bailout "was done with almost no independent consideration of the terms of the transaction or the impact that those terms might have on the future of AIG".

As a result, billions more than necessary went to US banks including Goldman Sachs, Merrill Lynch and Wachovia, as well European banks such as Societe Generale, Deutsche Banke and UBS, it says.

William Black, a former federal regulator in Missouri, said told Al Jazeera: "We'll spend more money bailing out AIG alone than the cost of the entire savings loaned back home, which was roughly $150bn.

"This was done with zero transparency and it was done gratuitously. There was not deposit insurance behind AIG. The treasury decided to take our tax dollars and transfer them to AIG's creditors and now the new report shows they transferred it in an immensely stupid fashion."

Barofsky also faults the NY Fed, headed at the time by Timothy Geithner, the US treasury secretary, for refusing at first to reveal which banks had received billions of US taxpayer dollars supposedly intended to save AIG.

The NY Fed released the banks' names and the amount of their payoffs only after politicians demanded greater transparency.

Fast events

The NY Fed and Federal Reserve Board issued a joint letter to accompany the report.

"We believe that the Federal Reserve acted appropriately in conducting these negotiations and that our negotiating strategy, including the decision to treat all counterparties equally, was not flawed or unreasonably limited," the statement said.

In its written response to the report, the US Treasury Department emphasised that the events "developed extremely quickly" and that officials did not intend to provide further assistance to AIG after the initial $85bn bailout that the report says tied their hands.

"This report overlooks the central lesson learned from [the AIG rescue]", Meg Reilly, a treasury spokeswoman, said in a statement.

"The lesson is that the federal government needs better tools to deal with the impending failure of a large institution [in times of crisis]"

Reilly said the proposed overhaul of financial regulation by the administration of Barack Obama, the US president, would accomplish that goal. 

Al Jazeera and agencies
Topics in this article
Featured on Al Jazeera
The author argues that in the new economy, it's people, not skills or majors, that have lost value.
Colleagues of detained Al Jazeera journalists press demands for their release, 100 days after their arrest in Egypt.
Mehdi Hasan discusses online freedoms and the potential of the web with Wikipedia founder Jimmy Wales.
A tight race seems likely as 814 million voters elect leaders in world's largest democracy next week.
A vocal minority in Ukraine's east wants to join Russia, and Kiev has so far been unable to put down the separatists.
Iran's government has shifted its take on 'brain drain' but is the change enough to reverse the flow?
Deadly attacks on anti-mining activists in the Philippines part of a global trend, according to new report.
Activists say 'Honor Diaries' documentary exploits gender-based violence to further an anti-Islamic agenda.
As Syria's civil war escalates along the Turkish border, many in Turkey are questioning the country's involvement.
join our mailing list