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What’s Haunting Timothy Geithner?

Criticism has dogged the treasury secretary for months. Now newly uncovered e-mails indicate how the New York Fed, under his tenure, directed AIG to keep quiet about its disbursement of $62 billion in bailout funds.


A cache of e-mails released Thursday by the office of Rep. Darrell Issa, a California Republican and ranking minority member of the House Committee on Oversight and Government Reform, paints a startling picture of how lawyers for the New York Fed directed AIG to withhold key details from the SEC about the billions in credit default swaps it had issued to some of the world's biggest banks, and its decision to make good on every penny of them, even as many of these banks were being bailed out themselves. At the request of Republican members of the Oversight Committee, its Democratic Chairman Rep. Edolphus Towns of New York, has announced that he will bring Geithner in front of the committee for a hearing later this month about the advice the New York Fed gave to AIG. If Geithner doesn't show, he could be subpoenaed. AIG has refused to comment on the matter.

The e-mails span five months beginning November 2008, and chart how the New York Fed pushed AIG to delay filings and become less and less transparent in disclosing its counterparty agreements, and in setting up the publicly-funded holding company, Maiden Lane LLC III, that was created to buy up toxic securities it had insured. Throughout the chain of e-mails, lawyers from Davis Polk & Wardell LLP, representing the New York Fed, actually cross out language explaining that AIG paid its counterparty banks "100 percent of the par value" of the bad securities it had insured. They also give it instructions not to mention the nearly $10 billion of synthetic CDO's that remained on its books. A synthetic CDO is a security whose underlying asset is not a bond, but an insurance contract on a bond. They are widely seen as some of worst of the toxic securities at the heart of the crash.

There are moments in the e-mails when lawyers for AIG push back, arguing for more disclosure, but in the end, they acquiesce. The exchanges depict AIG as stuck in the middle of a tug of war between the SEC and New York Fed, with the SEC trying to pull the bailed out insurance conglomerate toward transparency, and the New York Fed trying to keep it in the dark. While there don't appear to be any claims that AIG or the New York Fed acted illegally, the emails do bring to the fore the lack of transparency that permeats the system. "It appears the New York Fed deliberately pressured AIG to restrict and delay important information to the SEC," Rep. Issa said in a statement. "The lack of transparency is disturbing enough, but the outstanding question that remains is why the FRBNY didn't fight for a better deal for the American taxpayer."

The e-mails could spell more trouble for Geithner, who has drawn criticism from lawmakers over the last year for his perceived coziness with Wall Street. During much of the back and forth e-mails in November and December 2008, Geithner was still president of the New York Fed. But the Treasury Department and the New York Fed insist that he had nothing to do with the discussions, that he had recused himself of the matter in anticipation of his nomination by President Obama. "Secretary Geithner played no role in these decisions and indeed, by Nov. 24, he was recused from working on issues involving specific companies, including AIG," a Treasury spokesperson wrote in an e-mail to NEWSWEEK. The New York Fed followed shortly with a statement from its general counsel Thomas Baxter stating, "Matters of AIG securities law disclosure would not have been brought to the attention of the president of the Federal Reserve Bank of New York." Baxter has also been asked to attend the Oversight Committee hearing, scheduled for teh week of January 18.

Critics say that considering Geithner was at the time preparing to be appointed Treasury Secretary, a role in which he would undoubtedly have to deal with the swelling $182 billion AIG bailout, that it's unlikely he was completely in the dark. And that if he had disavowed himself of all knowledge of the situation with AIG, how well was he really doing his job?

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http://www.newsweek.com/id/229887