A report developed under the aegis of Rep. Darrell Issa accuses the Federal Reserve System and the U.S. Treasury Department of being "deceptive and dishonest" about the bailout of American International Group Inc. (NYSE:AIG).
Issa is the highest ranking Republican on the House Committee on Oversight and Government Reform Committee.
The committee is set to hold a hearing Wednesday on the AIG bailout details.
The Republicans conclude in their report that "the secrecy, concealment and lack of transparency in the conduct of the Federal Reserve [concerning the AIG bailout] have serious implications for the continued health of democracy and free markets."
AIG, New York, used credit default swaps to insure bundles of subprime mortgages and other financial assets held by banks. As the company's ratings deteriorated, it faced escalating demands for collateral. The Federal Reserve Bank of New York moved in late 2008 to pay off the AIG collateral obligations at 100 cents on the dollar.
AIG posted the collateral to its CDS counterparties from September 2008 to October 2008, and, by Nov. 5, 2008, AIG had drawn down about $61 billion of its initial $85 billion line of credit from the New York Fed, according to the authors of the Republican report.
The authors of the report note that the New York Fed was then headed by Timothy Geithner, who is now Treasury secretary.
Alternatives to having AIG pay off the AIG CDS obligations at anything less than par were rejected by New York Fed officials, and New York Fed officials never seriously tried to persuade the banks to take reduced payments, or "haircuts," the authors of the report assert.
The authors cite another report, by Neil Barofsky, the special inspector general for the Troubled Asset Relief Program. In that report, Barofsky states that, "Geithner concurred, and it was decided that FRBNY would cease efforts to negotiate haircuts…"
"These decisions began the backdoor bailout of AIG's counterparties, and the direct payment of $27.1 billion of taxpayer money (and the waiver of an additional $35 billion in collateral) to the largest banks in the U.S. and around the world," according to the authors of the Republican report.
Once the decision to pay counterparties at full value was made, the New York Fed began to cover up details about the transactions, and its law firm, Davis Polk & Wardwell, edited AIG Securities and Exchange Commission filings to remove information about the payments, according to the authors of the report.
