09 Jan Fed’s “Odd” Arrangement with AIG

R&R Consulting principal Sylvain Raynes is quoted in a McClatchy Newspapers report revealing further details of the Fed’s controversial bailout of AIG. The January 7 report says that in the weeks before Timothy Geithner’s confirmation as treasury secretary, his underlings at the Federal Reserve Bank of New York directed American International Group (AIG) to delay publicly disclosing that tax dollars were used to pay in full $62 billion in insurance-like bets it owed to major U.S. and foreign banks.

McClatchy Newspapers revealed in April 2009 that as part of the bailout, the New York Fed had opted to pay the full value of all of the mortgage-related swap contracts after European banks declined to accept discounted payments. Emails between the Fed and AIG made public by Bloomberg News on January 7 reveal a months-long disagreement over how much the public should be told about what ultimately became a back-door bailout of AIG by taxpayers.

R&R’s Raynes, an expert in structured securities of the kinds subject to the swap contracts, called it “very odd” that “the government actually worked against its own interests by paying right away” on contracts that didn’t expire for years. It would have been more advantageous, he said, for Fed officials to say, “We’re going to wait for the deals to work themselves out according to their terms” and demand proof of every default. “They could have lasted years and years like this.”

Read the full story by Greg Gordon, “Fed delayed disclosure of controversial AIG payout,” McClatchy Newspapers, January 7, 2009.