Bailout Watchdog Investigating Fed's AIG Secrecy

WASHINGTON -- An independent investigator is launching two probes into the government's rescue of American International Group Inc. and the insurer's subsequent payments of billions to big banks.

Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, says the Fed withheld documents he requested when auditing AIG's "backdoor bailouts" of banks it did business with, including Goldman Sachs Group Inc. Barofsky's allegations came in prepared testimony provided to members of the House Committee on Oversight and Government Reform and obtained by The Associated Press.

The Federal Reserve Bank of New York produced 250,000 pages of documents after committee Chairman Edolphus Towns, D-N.Y., issued a subpoena earlier this month.

Barofsky says in the testimony prepared ahead of his scheduled appearance before the committee on Wednesday that "issues have come to light that call into question whether the government has been and is being as transparent as possible with the American people." He blasts Treasury for issuing misleading public statements and outlines new investigations into the Federal Reserve and the New York Fed.

Because of Towns' subpoena, "documents have come to light that were not provided to the (watchdog) audit team during the course of the audit," Barofsky says, leading him to "review the extent of the Federal Reserve's cooperation."

The committee is investigating why the New York Fed, then led by Treasury Secretary Timothy Geithner, agreed to pay banks billions to cancel their contracts with AIG, which is based in New York.

Geithner approved the deals, which may have cost taxpayers billions more than necessary because he did not demand concessions from banks AIG did business with, according to Barofsky's earlier audit.

Barofsky, Geithner and New York Fed General Counsel Thomas Baxter will appear at a committee hearing Wednesday to answer questions about the deals. Former Treasury Secretary Henry Paulson also has been invited to appear.

"If anyone at the Fed thought that this investigation will stop after Wednesday's hearing -- they are completely mistaken," said California Republican Darrell Issa, the committee's top Republican. "There has been a widespread effort by officials at the New York Fed to thwart transparency, and we will continue to pursue this investigation for as long as it takes to get the truth."

Barofsky's second investigation is into e-mails from New York Fed lawyers instructing AIG to withhold some details of the deal from a disclosure filed with the Securities and Exchange Commission.

Lawmakers have chastised the Fed for refusing to say which banks benefited from the AIG bailout, and by how much. A series of e-mails released under the subpoena show New York Fed officials and lawyers arguing for AIG to reveal less information than it wanted about those deals and other matters.

"The New York Fed has fully cooperated with (Barofsky) and will continue to do so," a spokesman said in a statement. Fed officials have said many of the e-mails in question were taken out of context.

In his testimony, Barofsky rips into Treasury for public statements that he says misled the public about the AIG bailout. He cites a statement e-mailed by a Treasury representative that says "taxpayers will be made whole" on the part of the AIG transaction that has attracted the most scrutiny.

"Narrowly mentioning that taxpayers will be 'made whole' ... without mentioning the huge losses Treasury expects to suffer on other, inextricably linked parts of the very same transactions, is simply unacceptable; the American people deserve better," Barofsky says.

The news comes as the White House beats back a populist uprising against the reappointment of Fed Chairman Ben Bernanke, who was a key architect of the bailout.

Bernanke has called for a Government Accountability Office audit of the AIG deals.

Senators also are negotiating a deal to overhaul the financial system. They are considering stripping the Fed of some of its bank supervision powers. The House already passed a bill subjecting the Fed to unprecedented transparency.