Geithner’s New York Fed Ordered AIG to Violate Securities Law in 2008
Yves Smith over at Naked Capitalism commented on a report from Bloomberg News that just about made my eyes pop out of my head. Evidently, Darrell Issa got his hands on some 2008 emails between AIG and Tim Geithner’s New York Federal Reserve, wherein the NY Fed orders AIG to make material misstatements on SEC filings:
The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.
AIG’s Dec. 24, 2008, filing was challenged privately by the U.S. Securities and Exchange Commission, which polices the adequacy of disclosures by publicly traded firms. The agency said in a letter to then-CEO Edward Liddy six days later that AIG should provide a Schedule A, which lists collateral postings for the swaps and names the bank counterparties that purchased them from the company. The Schedule A was disclosed about five months later in a filing.
Not only were they hiding that AIG was set to pay the banks 100 cents on the dollar, turning the AIG bailout into a second back door bailout for the banks, they were trying to hide the reason that the bailout was needed.
Remember, back in 2008, when the establishment press was filled with stories about how the banks got suckered with bad loans taken out by poor people who bought houses they could not afford? Remember that was why we needed to bail out the banks. Well, it was bulls—erm, fresh, fragrant fertilizer.
More from Bloomberg:
The e-mails span five months starting in November 2008 and include requests from the New York Fed to withhold documents and delay disclosures. The correspondence includes e-mails between AIG’s Shannon and attorneys at the New York Fed and its law firm, Davis Polk & Wardwell LLP. Tom Orewyler, a spokesman for Davis Polk in New York, declined to comment as did Shannon.
According to Shannon’s e-mails obtained by Issa, the New York Fed suggested that AIG refrain in a filing from mentioning so-called synthetic collateralized debt obligations, which bundled derivative contracts rather than actual loans.
The filing “reflects your client’s desire that there be no mention of the synthetics in connection with this transaction,” Shannon wrote to Davis Polk on Dec. 2, 2008. “They will not be mentioned at all.”
AIG had about $9.8 billion of swaps protecting the synthetic holdings as of September 2008, the company said on Dec. 10, 2008. Goldman Sachs said in a press release last month that it was among banks that had losses on synthetic CDOs.
It wasn’t bad mortgages, it was Vegas-style gambling that was the problem. Synthetic collateralized debt obligations being the much-less-scientific equivalent of betting on a sports match or the roll of the dice. Not only are we looking at a potential violation of SEC rules (like rule 10b-5) and the Sarbanes-Oxley Act, but since Geithner was heading the New York Fed at the time, we are looking a potential violation of New York’s Martin Act. The Martin Act has both civil and criminal penalties. The Martin Act is supposedly one of the most powerful blue sky laws in the country.
Connecting the dots: Sarbanes-Oxley requires a company to report, within a few days, events that change the picture laid out by that company since their last SEC filing. They do this using a form called an 8-K. Making a material misstatement of fact on an 8-K is just as big a deal as making a material misstatement of fact on the period quarterly filings (10-Q) or yearly filings (10-K) required by Rule 10b-5.
According to Bloomberg (which unhelpfully did not link to the actual emails themselves), the emails obtained by Darrell Issa show that AIG’s counsel planned on properly disclosing both the names of the counterparties that would be receiving the back door bailout via AIG, as well as the true nature of the toxic assets (synthetic collateralized debt obligations rather than poor people’s mortgages). However, AIG was told by the New York Fed to strike out those pieces of information from the filing, and AIG complied.
This is unbelievable. They conspired to lie to the taxpayers, to Congress and to investors. Do they really expect that nothing will come of it?