This morning at 10am ET, the House Oversight Committee will hold three separate panels on the AIG bailout. The first features Treasury Secretary Timothy Geithner, who chaired the New York Federal Reserve Board at the time, which was instrumental in managing the bailout. The second panel will feature former Treasury Secretary Hank Paulson, who was at Treasury at the time. And the third panel includes a number of interested parties, including Thomas C. Baxter, general counsel of the Federal Reserve Bank of New York; Stephen Friedman, the former chairman of the New York Fed; Neil Barofsky, the special Inspector General for the TARP; and Elias Habayeb, the former chief financial officer of A.I.G. The hearings will be broadcast on C-SPAN and at the Oversight Committee’s website.

The hearing will look at the overall federal response to the AIG debacle, but at two specific circumstances in particular – 1) the decision to pay off the credit default swaps to AIG’s counter-parties “at par,” without forcing the banks involved to take a haircut; and 2) the effort by the NY Fed to hide disclosure of counter-party payment information to securities regulators, as revealed in recent emails. In addition to the Oversight Committee, Barofsky’s SIGTARP office is investigating the NY Fed anew over the disclosure issue (they first probed this issue in November).

Oversight Committee staffers have been poring over documents released by AIG in response to subpoenas, including some not available to SIGTARP last year, and have uncovered crucial information to which Paulson, Geithner and the rest of the panel will have to respond. Committee staffers seem relatively convinced by the documentary evidence that Geithner was not involved in the push by the NY Fed to withhold disclosure of counter-party payment information, including the names of counter-parties, amounts of the payments, and details regarding the “Maiden Lane III” special purpose vehicle which essentially purchased the CDOs that paid off the banks. But this does not reflect well on how the Treasury Secretary handled his leadership position at the NY Fed, if improper conduct could take place without his knowledge, and I would imagine lots of questions about Geithner’s conduct. Thomas Baxter, the NY Fed general counsel, will say that the issue didn’t rise to the level of importance that he would have shared it with Geithner. Really? Skirting SEC disclosure is a meaningless side issue? Indeed, we still do not know the exact amounts of the payments to the various companies, so expect that to be part of the testimony.

On the issue of counter-party payments, the new documents show that the Treasury and the Fed essentially took the term sheet that private banks were working from to use as a template for the AIG bailout, a terrible deal for the government prepared by the likes of JP Morgan and Goldman Sachs. First AIG and then the NY Fed reportedly tried to get the counter-parties to stand down throughout October and November 2008, and banks like Goldman Sachs, Deutsche Bank and the French firm Societe Generale simply refused, the documents show. However, somewhere along the line, the government gave up and paid off the banks at par, a decision that the SIGTARP report lays directly at the feet of Timothy Geithner.

Committee staffers allege that only mid-level operatives at Treasury and the Fed were negotiating with the bankers, and not Geithner, Paulson or Federal Reserve Chair Ben Bernanke. The attempt seemed half-hearted, and with leverage in the hands of the NY Fed, they could have forced haircuts to the counter-parties, but did not. In fact, Thomas Baxter, the NY Fed general counsel, wouldn’t even call the efforts negotiations. “I don’t know why we even bothered to ask (for any concessions),” he told committee staffers. Paulson will almost certainly be asked about this, committee staffers say, although he will testify that he had nothing to do with the decision on counter-party payments. But Geithner, who apparently signed off on dropping negotiations with the counter-parties and paying them off at par, will face scrutiny on this as well.

The New York Times reports that two Federal Reserve governors wanted AIG’s counter-parties to return $30 billion in payments, calling them “a gift.” They were eventually overruled.

One email, from NY Fed staffer Meg McConnell to Geithner, was highly critical of Treasury and the Federal Reserve’s participation in managing the AIG mess and particularly Dan Jester, Hank Paulson’s hand-picked associate to deal with AIG (needless to say, he was a former Goldman employee). “I sat in on the AIG call with Board staff… so that Jester could spend half an hour telling Sarah that there would be no capital and we would need to make ‘something else’ work,” McConnell writes. “Leaving aside Treasury’s unfortunate (untenable?) stance on this, Board staff still doesn’t seem to be attacking this in a ‘here’s what we need to do and why’ kind of way.”

Baxter will defend the bailout and the counter-party payments in his remarks, as will Geithner presumably, as he’s been on the record that the counter-parties could only be paid at par, because that’s all the banks we’re willing to accept. But the claim that Treasury and the Federal Reserve had little bargaining power doesn’t hold up to scrutiny.

There’s also the issue of Friedman, who will appear on the third panel:

Mr. Friedman also addressed another sore subject: his purchases of Goldman Sachs stock on Dec. 17, 2008, and Jan. 22, 2009, after the Fed had decided to pay out A.I.G.’s counterparties in full. Many have questioned the move by Mr. Friedman, a former Goldman chief executive who remained a director of the firm even as he was chairman of the New York Fed.

Mr. Friedman contended that it was no secret that he was a Goldman director when he was first appointed to the New York Fed. Nor was it unknown that Goldman was a major A.I.G. counterparty. He reiterated that he had received clearance from the general counsels of both Goldman and the New York Fed.

Bernanke, whose nomination for another term at the Fed is nearing a vote, may be hiding documentation that his staff told him not to bail out AIG at all, and he ignored their warnings.

Sen. Jim Bunning (R-Ky.), a Bernanke critic, said on CNBC that he has seen documents showing that Bernanke overruled such a recommendation. If that’s the case, it raises questions about whether bailing out AIG was actually necessary, and what Bernanke’s motives were.

A letter Bunning sent Monday to Banking Committee Chairman Chris Dodd (D-Conn.) also refers to an “[e]mail exchange regarding restructuring of assistance to AIG, initiated by Treasury Secretary Timothy Geithner” in March 2009 […]

Meanwhile, Rep. Darrell Issa (R-Calif.), who has been investigating the AIG bailout in his role as ranking Republican on the House Oversight and Government Reform Committee, said that a whistleblower has informed him of “troubling details” of Bernanke’s role in the bailout.

There may be nothing incriminating in the documents, but without access to them, the Senate will be voting to confirm him in the dark.

This may also come up in the course of the investigation.

Here are some documents to guide you through the hearings:

Thomas Baxter’s remarks prepared for the hearing.
Stephen Friedman’s remarks prepared for the hearing.
Elias Habayeb’s remarks prepared for the hearing.
Neil Barofsky’s remarks prepared for the hearing.
Oversight Committee Staff Report and various AIG documents
Republican Staff Report on AIG bailout.

David Dayen

David Dayen