Controversial deals were part of rescue effort at the peak of financial crisis
WASHINGTON - Republicans in both houses of Congress called Thursday for hearings to investigate revelations that the Federal Reserve Bank of New York, led at the time by Treasury Secretary Timothy Geithner, pushed for greater secrecy on controversial bailout deals.
E-mails between lawyers for the New York Fed and bailed-out insurance conglomerate American International Group Inc. show AIG wanted to disclose some details about billions in payments it made to banks to cancel financial deals.
But lawyers for the New York Fed, which engineered AIG's bailout with the Bush administration's Treasury Department, told AIG to remove the information from a draft.
The e-mail exchanges occurred at the height of the financial crisis in the fall of 2008.
"People at the grass roots are reckoning with the realities of a battered economy every day, so arguments that clearly benefit the big banks ought to be studied," said Sen. Charles Grassley, the top Republican on the powerful Senate Finance Committee.
In a statement, Grassley questioned Fed and Treasury Department claims that the details of the bailout had to be kept secret so that the country would be spared bank runs and other economic problems. He said the Finance Committee should hold hearings about the $700 billion financial bailout Congress passed at the peak of the financial crisis.
"The mindset to cover up bad news played a big part in creating the financial crisis in the first place," Grassley said.
Republican staff on the House Committee on Oversight and Government Reform also are drafting a letter calling for new hearings at which Geithner would testify on the matter, said Kurt Bardella, a spokesman for Darrell Issa, the committee's top Republican. Issa's office released the e-mails Thursday.
Geithner was president of the New York Fed at the time of the e-mail exchanges. Executives from Goldman Sachs and other Wall Street banks that benefited from the AIG deals helped elect him to that position.
A watchdog report has said Geithner and the New York Fed mismanaged the AIG rescue, potentially handing billions more than necessary to banks that have since recovered and are again paying record bonuses.
The New York Fed has countered that officials were focused on defusing the worst financial crisis in generations. It says officials were trying to protect the value of the taxpayer investment. And it says paying the banks less or sharing more information could have sparked a global financial collapse.
But lawmakers of both parties have criticized how Geithner and the New York Fed handled the AIG bailouts. They say Geithner went too easy on the Wall Street banks that helped elect him president of the New York Fed and has been too willing to rush to their aid.
Issa said the information raised new doubts about Geithner's qualifications.
"This begs the question, knowing what we know now: Would he have even been confirmed?" he said in a statement.
The names of the banks that benefited from AIG's bailouts earlier were kept secret by the Fed's Board of Governors, which oversees the regional banks. Fed Vice Chairman Donald Kohn told lawmakers in March that identifying the banks could upend financial markets just as they were beginning to stabilize.
"We need AIG to be stable ... and I would be very concerned that if we started giving out the names of counterparties, people wouldn't want to do business with AIG," Kohn said.
But when the Fed did reveal which banks had gotten the money, and how much they got, there was little reaction in the markets.
Reacting to Thursday's news, Republican Rep. Roy Blunt claimed Geithner "and his staff were complicit in a scheme to cover up information they viewed as politically damaging."
But New York Fed General Counsel Thomas Baxter said the Fed's financial stake made its input appropriate, "with the understanding that the final decision rested with AIG" and its lawyers.
"Our focus was on ensuring accuracy and protecting the taxpayers' interests during a time of severe economic distress," Baxter said in a statement. "All information was in fact disclosed that was required to be disclosed by the company, showing that counterparties received par value. There was no effort to mislead the public."
The proposed hearings would require support from the committees' Democratic chairmen. Neither could be reached for comment late Thursday.
Treasury spokeswoman Meg Reilly said in a statement that this part of the AIG bailout "is on track to be paid back in full with interest so that taxpayers will be made whole."
"Somehow that fact that the government's loan is 'above water' gets lost in all the consternation," she said.
The e-mails were reported earlier by Bloomberg News.