Rush to bail out AIG led to higher costs: audit


The logo of the American International Group (AIG) outside their office in the lower Manhattan area of New York. The Federal Reserve's haste in bailing out AIG last year forced the US government to come up with tens of billions of dollars more for the insurance giant's counterparties, auditors said.

The logo of the American International Group (AIG) outside their office in the lower Manhattan area of New York. The Federal Reserve's haste in bailing out AIG last year forced the US government to come up with tens of billions of dollars more for the insurance giant's counterparties, auditors said.

BUSINESS|AFP The Federal Reserve’s haste in bailing out AIG last year forced the US government to come up with tens of billions of dollars more for the insurance giant’s counterparties, auditors said.

A report to be released Tuesday by special inspector general Neil Barofsky, who is overseeing spending of the 700-billion-dollar Troubled Asset Relief Program, said the central bank was forced to act quickly with AIG on the verge of a meltdown that some believed would have crippled the financial system.

Acting through the Federal Reserve Bank of New York, the central bank had to pull together a loan of 85 billion dollars for AIG on September 16, 2008, after a private bank consortium rejected a new credit line of 75 billion dollars, the report said.

“In a rush to take action quickly, the (Fed) did not craft its own terms and instead simply adopted in substantial part the economic terms of a draft term sheet under consideration by a consortium of private banks,” Barofsky wrote.

The high interest rate in the loan weakened AIG further, he said, and the bailout reduced any leverage in negotiating “haircuts” with AIG counterparties — banks and others that had obtained credit default swaps, a form of insurance for their mortgage securities, through AIG.

In finance, a haircut is a percentage subtracted from the par value of assets used as collateral.

The government’s AIG bailout eventually reached over 170 billion dollars, including 62.1 billion dollars that was “effectively transferred” by the government to various banks at 100 percent of face value, the inspector general said.

The report said questions had been raised about whether this was a “backdoor bailout” of banks.

Although the intent to bail out banks was not clear, the report said the effect of the actions was “that tens of billions of dollars of government money was funneled inexorably and directly to AIG’s counterparties.”

The report said Fed officials believe these funds will eventually be repaid from the underlying mortgage assets, but that “it is difficult to assess the true costs of the Federal Reserve’s actions until there is more clarity as to AIG’s ability to repay all of its assistance from the government.”

The counterparty payments were not initially disclosed but in March AIG revealed the amounts paid to major banks.

French bank Societe Generale received a total of 16.5 billion dollars, and Goldman Sachs received 14 billion dollars.

According to the company’s figures, 13 of the top 20 payouts were made to firms not based in the United States.

The report said the New York Fed, headed at the time by Timothy Geithner, the current Treasury secretary, “made several policy decisions that limited its ability to obtain any concessions from the counterparties.”

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