Talking the Economy with Treasury Secretary Timothy Geithner

USA Today / Maria Bartiromo

 

Today marks the debut of an exclusive column for USA TODAY by Maria Bartiromo. The CNBC anchor will interview top leaders in business and government about issues affecting our finances.

If anyone has a good handle on how long it will take to solve the U.S. unemployment problem, it's Treasury Secretary Timothy Geithner.

In an interview about jobs and the economy, Geithner told me businesses still aren't sure how much demand there will be for their products — and that is what needs to change before they will start hiring again.

With six weeks until the midterm elections, Geithner described the Obama administration's effort to put jobs and the economy at the top of its agenda. And while the housing industry is still in a slump, Geithner said the good news is house prices have been stable for more than a year and homes are much more affordable.

The following are excerpts from my interview with the Treasury secretary, edited for clarity and length.

Q: What do you think it's going to take to get businesses to add new heads to the payroll?

A: It's going to take time, because what businesses need most is to become more confident about how much demand they're going to see for their products.

What you're seeing early in the recovery is that they added back hours before they started to add jobs. But they did start adding jobs more quickly than they did the last two recoveries. They're starting that process of bringing people back on, but they've been doing it very gradually because they want to be very confident that the demand for their products is going to be there. And part of that is going to depend on their judgment that we're most of the way through this adjustment process we're going through and that people are saving more, spending less and borrowing less because they want to reduce the amount of debt they hold relative to income.

Q: There is this big debate right now on whether extending the tax cuts for everybody would be more helpful than keeping out the highest earners in that mix. Do you worry that not extending them for the highest earners will be an issue with what you've just said about ensuring that people spend more, put more money back into the economy?

A: What everybody agrees on is, we should extend what we call the middle-class tax cuts. But they also go to about 97% of small businesses. And if we were to move and Congress were to act now on those fronts, that would provide a lot of certainty. We've also proposed making sure that we keep the top rate on dividends, the capital gains, from rising beyond 20%.

Q: Two years after Lehman declared bankruptcy, where are we now in the state of the banking sector? We have new rules requiring more capital. How would you characterize the state of capital for the banking sector today?

A: The U.S. banking system today is in a dramatically stronger position with much higher levels of capital than they had coming into the crisis and a lot more capital relative to most of their major global competitors. And that's a hugely important accomplishment. The government got a very substantial positive return on the investments we made at the banks. We forced private capital to come into the system much earlier than anybody has ever done in a crisis. And we passed a sweeping set of reforms, not just of our financial system, but we're trying to do that on a global basis with a level playing field.

Q: A lot of people say housing is missing in action in this recovery. About a half a million mortgages have been modified under the government's Making Home Affordable program since it started almost 18 months ago. Foreclosures are still high, about 11 million borrowers are under water, and some economists say prices are likely to fall more when the banks unload the foreclosed properties they've been holding off the market. Do you think the administration's programs to aid the housing markets have been a success?

A: You have to judge these things against the alternatives. And what the president's program did, alongside what the Federal Reserve did, is bring a measure of stability to house prices much more quickly than people thought. If you look at where the market thought house prices would go at the beginning of 2009, people thought they might fall another 30%. And what happened is they stabilized because we were able to bring mortgage interest rates down to very low levels, and that helped slow the pace of erosion.

House prices have been reasonably stable for more than a year. Mortgage interest rates are very low. Housing is much more affordable than it's been in a really long time.

But there's still a huge backlog of foreclosures working their way through the system. Now, we can't reach everybody, and a lot of those foreclosures are people with a jumbo (mortgage), it's a relatively expensive home, it's a second home, it's an investor-owned property or it's a family that can't prove income. We just don't think it's fair to ask the American people to use their money, their hard-earned resources, to try to extend the benefits of these programs to people who ended up just living way beyond their means.

I do not agree with people who think that we should be stepping back from the housing market. That would be a mistake. It would be really unfair to all the innocent victims of this crisis.

Q: The president just proposed additional stimulus, the $50 billion toward infrastructure. Can you talk about this plan? And also what is the likelihood that we are going to see jobs created as a result of infrastructure projects? Where and when would those jobs be created?

A: He's proposing to kick-start a multiyear program to upgrade the basic quality of transportation infrastructure in the country. That's very good for the business community because it will make it easier for them to get their products to market. But it's also very good for job creation, because it helps provide some support in areas where people were most hurt by the crisis.

A lot of the pain of the crisis has been borne by people that were in the construction industry. And so it's a very powerful way to get people back to work. It doesn't happen overnight. As you saw in the Recovery Act, a lot of the money that was put aside for public infrastructure took a long time to get through the pipeline, for projects to get approved, for people to be hired. A lot of that is still working its way through the pipeline. But our unemployment problem is going to take a while to solve.

Q: What about the people who say, "I thought that money was already going to infrastructure in the initial Recovery Act stimulus plan"?

A: The Recovery Act was a mix of tax cuts, almost $300 billion in tax cuts, as well as support for the safety net for people who lost their jobs through extended unemployment benefits and health insurance, as well as money for state and local governments. So infrastructure was just one piece, and a lot of that money is still working its way through the pipeline as states put these resources to work.

Q: How important are China and India and the emerging markets to the growth of the U.S.? Everybody's always talking about growth outside the U.S. and all these vibrant economies. Why does the average American need to understand that story?

A: Those countries are the most populous and the most rapidly growing countries on the planet. They have huge growing needs for a range of things that Americans are uniquely good at producing. We have a huge stake in those markets, and the parts of the economy now that look the strongest — high-tech and a bunch of manufacturing sectors where the recovery started soonest — are strong in part because our companies are so strong in those markets.

Q: So we need to be selling to those markets because they're so populated?

A: It's not just that there's a lot of people who live in those countries but that they're growing very, very rapidly. And as they become more prosperous as countries, they're going to need a lot of things. And we are good at making a lot of things they need, not just airplanes and not just high-technology, but a whole lot of the things that the American economy is uniquely productive at.

Q: Every time I speak to CEOs, I hear a similar complaint — they're worried about higher health care expenses and higher taxes in 2011. That's why they're sitting on cash. Companies are sitting on, what, $1.8 trillion? Why are they being so conservative with their money, and how are you going to change that mentality so they can start creating some jobs that we need?

A: The biggest thing holding back business spending, and this is what all businesses say, is the scars of the crisis. The crisis was such a shock, caused such a huge panic, and people who faced that trauma have been very tentative about putting that capital to work and hiring back the people that they let go. But it's important to recognize, Maria, despite all the concern out there, businesses always want to have lower taxes and they're always going to want less regulation.

Q: Nouriel Roubini, the New York University economist, said there's a 40% chance of a double-dip recession. What do you say to that?

A: I talk to businesses across the country, and I watch very carefully what private forecasters are saying about the growth outcome. Most people attach a very low probability to a double-dip or a second recession.

Of course, there's always some chance that these recoveries that follow financial crises are much tougher, they're much slower, they're much more protracted, they're much more uneven. That's the tragic reality of recoveries that follow financial crises. But, again, I think that our economy is gradually getting stronger.

Geithner Says U.S. Shouldn’t Separate Banks From Risk

Bloomberg / Business Week

U.S. Treasury Secretary Timothy F. Geithner rejected calls to separate banks from risk-taking activities, saying it couldn’t prevent future financial crises.

“To create stability, some argue, we should just separate banks from ‘risk,’” Geithner told the Financial Crisis Inquiry Commission in Washington today. “But, in important ways, that is exactly what caused this crisis.”

Legislation proposed by U.S. Senator Blanche Lincoln, an Arkansas Democrat who leads the Senate Agriculture Committee, would force banks to wall off some of their derivatives-trading desks. Lincoln’s measure would require Goldman Sachs Group Inc., JPMorgan Chase & Co. and rival banks to push their swaps desks to subsidiaries.

“We cannot make the economy safe by taking functions central to the business of banking, functions necessary to help raise capital for businesses and help businesses hedge risk, and move them outside banks, and outside the reach of strong regulation,” Geithner said.

The Treasury secretary and his predecessor, Henry Paulson, testified to the panel investigating the causes of the financial crisis as Congress debates the most sweeping overhaul of banking regulations since the Great Depression. U.S. policy makers and lawmakers are concluding that capital requirements didn’t adequately cover risks that built up in the system and that the threat to the economy if house prices started to decline in value was underestimated.

Not Powerless

“Absolutely, we could’ve done more,” Geithner said. “I do not believe we were powerless.”

If the government had “moved more quickly to put in place better-designed constraints on risk-taking that captured where there was risk in the system, then this would have been less severe,” Geithner said.

Geithner, 48, reiterated his support for the financial overhaul, saying proposed legislation would “require the enforcement of more conservative capital and leverage requirements on the activities, whether on- or off-balance- sheet, of all major financial institutions.”

A firm such as American International Group Inc. or Lehman Brothers Holdings Inc. “will not be able to escape consolidated supervision by virtue of its corporate form,” said Geithner, who was president of the Federal Reserve Bank of New York from 2003 to 2009. Financial rule changes also “will bring comprehensive oversight and transparency” to over-the-counter derivatives markets, he said.

Market Discipline

Geithner called the financial turmoil “a pure failure of market discipline.” More oversight is needed because “the history of this crisis is full of examples where regulators did not use the authority they had early enough or strongly enough to contain risks in the system,” he said.      Paulson, 64, said the mistakes he made were communications failures that contributed to government bailouts that were subjected to widespread public criticism.

He also said credit-rating companies were “a dangerous crutch” that too many investors and banks depended on leading up to the crisis.

Companies such as Standard & Poor’s, Moody’s Investors Service and Fitch Ratings “should give their advice just like equity research houses do, and I think investors should look at those as one tool,” said Paulson, who was Treasury chief from 2006 to 2009. “I don’t want the ratings agencies to be held up as the font of all truth and have the ratings be part of our securities laws.”

Shadow Banking

The inquiry commission was holding hearings on the so- called shadow banking system, financial activities that don’t fall under traditional banking regulations.

Former Bear Stearns Cos. chief executive officers James “Jimmy” Cayne and Alan Schwartz, and former Securities and Exchange Commission Chairman Christopher Cox testified yesterday about the firm’s collapse.

Paulson said bets against Bear Stearns’s survival before the firm’s sale to JPMorgan Chase & Co. amounted to “the wolf pack trying to pull down the weak deer.”

“I don’t use the word collusive because it’s got a legal connotation,” said Paulson, a former Goldman Sachs chairman. “It sure looked to me like some kind of coordinated action,” even if “I’m not saying there was behavior that was illegal.”

Short Sellers

Short-selling “is essential for the price-discovery process,” Paulson said.

The financial legislation being debated in Congress broke through a logjam in the Senate yesterday.

Lawmakers voted for an amendment offered by Senators Christopher Dodd, a Connecticut Democrat, and Richard Shelby, an Alabama Republican, to drop a $50 billion industry-supported fund to cover the cost of unwinding a failing firm, and ensure that shareholders and unsecured creditors bear losses when the government liquidates a business.

The Senate also approved an amendment offered by Senator Barbara Boxer, a California Democrat, to bar use of taxpayer funds to rescue failing financial companies.

Obama's 'Volcker Rule' Shifts Power Away From Geithner

The Washington Post

For much of last year, Paul Volcker wandered the country arguing for tougher restraints on big banks while the Obama administration pursued a more moderate regulatory agenda driven by Treasury Secretary Timothy F. Geithner.

Thursday morning at the White House, it seemed as if the two men had swapped places. A beaming Volcker stood at Obama's right as the president endorsed his proposal and branded it the "Volcker Rule." Geithner stood farther away, compelled to accommodate a stance he once considered less effective than his own.

The moment was the product of Volcker's persistence and a desire by the White House to impose sharper checks on the financial industry than Geithner had been advocating, according to some government sources and political analysts. It was Obama's most visible break yet from the reform philosophy that Geithner and his allies had been promoting earlier.

Senior administration officials say there is now broad consensus within the White House and the Treasury for the plan advanced by Volcker, who leads an outside economic advisory group for the president. At its heart, Volcker's plan restricts banks from making speculative investments that do not benefit their customers. He has argued that such speculative activity played a key role in the financial crisis. The administration also wants to limit the ability of the largest banks to use borrowed money to fund expansion plans.

The proposals, which require congressional approval, are the most explicit restrictions the administration has tried to impose on the banking industry. It will help to have Volcker, a legendary former Federal Reserve chairman who garners respect on both sides of the aisle, on Obama's side as the White House makes a final push for a financial reform bill on Capitol Hill, a senior official noted.

Advocates of Volcker's ideas were delighted. "This is a complete change of policy that was announced today. It's a fundamental shift," said Simon Johnson, a professor at MIT's Sloan School of Management. "This is coming from the political side. There are classic signs of major policy changes under pressure . . . but in a new and much more sensible direction."

Industry officials, however, said they were startled and disheartened that Geithner was overruled, in part because they supported the more moderate approach Geithner proposed last year.

"His influence may have slipped," said a senior industry official who spoke on the condition of anonymity to preserve his relationship with the administration. "But you could also argue that it wasn't Geithner who lost power. It's just that the president needed Volcker politically" to look tough on big banks.

Geithner agreed with Volcker that banks' risk-taking needed to be constrained.

But through much of the past year, Geithner said the best approach to limiting it is to require banks to hold more capital in reserve to cover losses, reducing their potential profits. Geithner said blanket prohibitions on specific activities would be less effective, in part because such bans would eliminate some legitimate activity unnecessarily.

The shift toward Volcker's thinking began last fall, according to government officials who spoke on the condition of anonymity because the deliberations were private.

Volcker had been arguing that banks, which are sheltered by the government because lending is important to the economy, should be prevented from taking advantage of that safety net to make speculative investments.

To make his case, he met with lawmakers on Capitol Hill and gave numerous speeches on the subject, traveling to at least nine cities on several continents to warn that banks had developed "unmanageable conflicts of interest" as they made investments for clients and themselves simultaneously.

"We ought to have some very large institutions whose primary purpose is a kind of fiduciary responsibility to service consumers, individuals, businesses and governments by providing outlets for their money and by providing credit," he said during one speech in Toronto. "They ought to be the core of the credit and financial system. Those institutions should not engage in highly risky entrepreneurial activity."

Gradually, Volcker picked up allies. John Reed, the former chairman of Citigroup, expressed his public support. So did Mervyn King, governor of the Bank of England.

His ideas began gaining traction within the administration in late October, when the president convened a meeting of his senior economic advisers in the Oval Office to hear a detailed presentation by the former Fed chairman.

There was no immediate change of course. But after the House passed a regulatory reform bill on Dec. 11 that was largely based on the Geithner's vision, the administration began to warm to Volcker's ideas, which had the political value of seeming tough on Wall Street, said sources in contact with the Treasury and White House.

At the time, administration officials were growing concerned that government guarantees designed to spur lending by letting banks borrow cheaply were instead funding banks' speculative investments and fueling soaring profits, said Austan Goolsbee, a member of the president's Council of Economic Advisers.

"We started coming out of the rescue and you saw some of the biggest financial institutions . . . who had access to cheap financing . . . use that money without lending or anything, just doing their own investments," he said. "That clearly started putting [the issue] on the radar screen for us."

Goolsbee said that Vice President Biden became a particular advocate for Volcker's approach.

In mid-December, the president formally endorsed Volcker's approach and asked Geithner and Lawrence H. Summers, the director of the National Economic Council, to work closely with the former Fed chairman to develop proposals that could be sent to Capitol Hill. The three men had long discussions about the idea, including a lengthy one-on-one lunch between Geithner and Volcker on Christmas Eve.

Summers and Geithner had been reluctant to take on battles that weren't at the heart of the problem that fueled the crisis. But ultimately, an administration official said, the two men concluded that reform needs to be about more than just fighting the last war -- it needs to address sources of future risk as well.

AIG Fiasco Is Getting Worse

Fortune

The AIG bailout isn't going away, much as Treasury Secretary Tim Geithner might like it to.

The $180 billion fiasco was back in the news Thursday, after Bloomberg reported that the Federal Reserve Bank of New York prodded the troubled insurer at the end of 2008 to withhold some gory details of its bailout deal from the public.

The instructions came at a time when Geithner, who is now the Treasury secretary, led the New York Fed. Along with Fed chief Ben Bernanke and former Treasury Secretary Henry Paulson, Geithner was one of the key architects of the federal response to the economic meltdown of 2008.

The New York Fed says the final decision on disclosures always rested with AIG (AIG, Fortune 500), which since September 2008 has been propped up by multiple infusions of taxpayer funds. But the claim rings hollow, given all the bailout-information jockeying of the past year.

Around the time the New York Fed was striking details from an AIG securities filing, former Bank of America (BAC, Fortune 500) chief Ken Lewis was deciding not to let investors in on what a disaster the bank's purchase of brokerage firm Merrill Lynch was shaping up to be.

Lewis claimed Paulson and Bernanke pressured him not to disclose growing losses at Merrill to shareholders -- a claim the policymakers rejected and that many observers pooh-poohed.

Just a few months later, the Washington Post revealed that regulators at the Federal Housing Finance Authority had pressured executives at troubled mortgage financing company Freddie Mac (FRE, Fortune 500) not to disclose the cost of carrying out its expanded federal housing-market support duties.

In that case, Freddie Mac made the disclosure, though only after negotiating with regulators over its wording.

The common theme seems to be that government officials "don't want to do anything to spook the public or investors," said Peter Cohan, a management consultant in Marlborough, Mass. "Of course, then you end up with a lot of other fallout later, as we can see now."

Emails disclosed Thursday showed that the New York Fed instructed AIG to withhold from a securities filing information on the counterparties that received taxpayer money in AIG's bailout, including the fact that the counterparties got 100% of their investment back.

That information remained secret for months, until Congress pressured the Federal Reserve to give it up in March, over the Fed's insistence that doing so would damage market confidence.

A week after Fed Vice Chairman Donald Kohn was lambasted by senators for the failure to disclose the recipients, AIG published the list, which was topped by France's Societe Generale and Goldman Sachs (GS, Fortune 500).

"The whole line that there would be a panic if they disclosed the counterparties, that was total BS," Cohan said. "It was just a backdoor bailout of the banks on the other side of those trades."

Nine months later, the issue remains a headache for the never-popular Geithner. Bernanke, who played no role in the emails released Thursday but has yet to be confirmed for a new term by the full Senate, could face a tougher grilling later this month as bailout rage builds in Congress.

However they fare politically, officials may find it tough to live down the images formed by their apparent efforts to thwart bailout disclosure, Cohan said.

"It makes you think they were panicked and terrified, and you just don't know the whole picture," he said.

N.Y. Fed Told AIG To Shield Payments

The Wall Street Journal

The Federal Reserve Bank of New York told American International Group Inc. not to disclose key details of their agreements to make big payouts to banks in the insurer's regulatory filings in late 2008, according to a set of email exchanges released Thursday.

AIG later amended its regulatory filings several times over the following months and provided the information after the Securities and Exchange Commission requested more disclosure. Congress also pressured the insurer to release the names of banks that were paid off in full on $62 billion in bets on soured mortgage securities. The biggest payouts went to French bank Société Générale and to Wall Street firm Goldman Sachs Group Inc., AIG finally said publicly in mid-March 2009.

The government's handling of the AIG bailout continues to draw scrutiny and has created political difficulty for Treasury Secretary Timothy Geithner, who was president of the New York Fed when it first bailed out AIG in September 2008. He played a key role in the regional Fed bank's controversial November 2008 decision to make U.S. and European banks whole on their mortgage gambles with AIG, according to a government audit last year.

Treasury spokeswoman Meg Reilly said what has been overshadowed is the fact that the government expects to be repaid in full, with interest, on the money it provided to buy the AIG-linked securities.

 

But a Treasury spokeswoman said Mr. Geithner wasn't involved in AIG's disclosure decisions, even though discussions about them took place in late November 2008, when he was selected as treasury secretary by President Obama. Mr. Geithner "played no role in these decisions and indeed, by Nov. 24, he was recused from working on issues involving specific companies, including AIG," the spokeswoman said.

"There was no effort to mislead the public," said Thomas Baxter, general counsel of the New York Fed, on Thursday. He said it was "appropriate" for the institution to comment on AIG's disclosures on transactions involving the New York Fed, "with the understanding that the final decision rested with AIG and its external securities counsel."

"Our focus was on ensuring accuracy and protecting the taxpayers' interests during a time of severe economic distress," Mr. Baxter said. Amid the financial crisis in late 2008, the Fed was reluctant to have AIG's trading partners identified because it feared such information would discourage other firms from doing business with the insurer and spark worries about the banks themselves.

An AIG spokesman declined to comment on the issue.

Copies of email exchanges from late November 2008 to March 2009 between lawyers representing AIG and the New York Fed were released by Rep. Darrell Issa (R., Calif.), ranking minority member of the House Committee on Oversight and Government Reform.

The emails show lawyers discussing what to disclose in AIG's December SEC filings about agreements the New York Fed and AIG's financial-products division struck to make banks whole on credit-default swap contracts they had purchased from AIG.

In a Nov. 25 email, Peter Bazos, an attorney at law firm Davis Polk & Wardwell, which represents the New York Fed, wrote that certain agreements "do not need to be filed." One agreement contained the names of banks that received payouts from AIG. A Davis Polk spokesman declined to comment.

In response, an AIG in-house lawyer, Kathleen Shannon, said the company and its law firm Sullivan & Cromwell "believe that the better practice and better disclosure in this complex area is to file the agreements." She also wrote that staff at the SEC "would not be particularly happy with a decision to withhold the documents at this time."

Subsequent email exchanges in December 2008 showed extensive editing that lawyers for the New York Fed made to an AIG draft filing and press release. When AIG released its 8-K filing on Dec 24, it made mention of a list of its derivative transactions, but a schedule supposed to contain them was left blank.

Six days later, on Dec 30, the SEC sent a letter to Edward Liddy, AIG's CEO at the time, requesting revisions to the filing and more information about the agreement, including the list of derivative transactions. In mid- January 2009, AIG amended its filing and submitted the list of deals to the SEC, but its public filings didn't include the list, saying that "confidential treatment has been requested for the omitted portions."

In early March, Federal Reserve vice chairman Donald Kohn told a congressional hearing he couldn't reveal the names of AIG's counterparties or how much was paid to each of them, saying that information "would undermine the stability of the company and could have serious knock-on effects to the rest of the financial markets and the government's efforts to stabilize them."

Days after the hearing, AIG released the names of its counterparties, listing 16 banks that had received a total of $62.1 billion in payments as part of agreements to tear up their derivative contracts with the insurer.

Mr. Geithner has become a convenient target for lawmakers angered by how top officials went about bailing out the financial system. At a series of increasingly contentious hearings on Capitol Hill, Mr. Geithner was taken to task for events and actions that occurred both during and after his time at the New York Fed, from issues such as bonuses paid to AIG executives and the failure to negotiate aggressively with the insurer's counterparties.

Treasury spokeswoman Meg Reilly said what has been overshadowed is the fact that the government expects to be repaid in full, with interest, on the money it provided to buy the AIG-linked securities.

"Somehow that fact that the government's loan is 'above water' gets lost in all the consternation," Ms. Reilly said. The outstanding loan balance stood at $18.6 billion at the end of December, while the fair market value of the securities portfolio was $22.6 billion, according to Treasury figures.

Fed Advice To AIG Scrutinized

NY Times

New revelations that the government stopped the American International Group from revealing information about its bailout had securities lawyers and policy makers buzzing on Thursday about whether the information had to be disclosed under federal securities law, and if so, what to do about the lack of compliance.

Joel Seligman, a historian of the Securities and Exchange Commission, said the disclosure rules were supposed to apply to all public companies, with only a few narrow exceptions for things like trade secrets and national security. There was no exception for “too big to fail” companies on federal life support, he said. Companies are supposed to disclose all information that could be material, though that term is not clearly defined.

“When an organization is troubled, it actually makes disclosures of this kind more important,” Mr. Seligman said.

Others disagreed, saying that bank and insurance regulators normally keep their discussions with struggling financial institutions private, to keep from inciting runs. There has always been tension, one securities lawyer said, between banking regulators, who want to resolve problems behind closed doors, and the federal securities laws, which compel disclosure.

The latest concerns that the government was suppressing important information about A.I.G. arose on Thursday after Representative Darrell Issa, a Republican of California, obtained e-mail messages between the insurer and the Federal Reserve Bank of New York, in which a Fed lawyer told A.I.G. “there should be no discussion” of certain details of the bailout in a regulatory filing.

The e-mail messages dealt with one of the most controversial aspects of A.I.G.’s bailout: that the Fed was paying the insurer’s trading partners 100 cents on the dollar for their soured investments. A.I.G. cited this fact, but the lawyer crossed the reference out.

The Fed also struck a paragraph about other investments that could not be unwound.

The New York Fed said on Thursday that it was offering advice, not orders, and that the second reference was irrelevant and did not apply to the transaction that A.I.G. was describing in its regulatory filing.

Securities requirements aside, Mr. Issa said this secretiveness flew in the face of good public policy and said he wanted to bring the Treasury secretary, Timothy F. Geithner, to Capitol Hill “to get every side of the story and understand what the motive and intent was of these actions.”

Mr. Geithner was president of the New York Fed at the time of the e-mail exchange. As part of its bailout, the government took a 79.9 percent stake in A.I.G., and Mr. Issa said he thought taxpayers had the right to know the details of the company’s finances.

The contents of the messages were first reported by Bloomberg News.

The messages showed that in December 2008, A.I.G. was preparing a filing to explain how it had eliminated a portfolio of derivatives, known as credit-default swaps, through an entity created with the Fed called Maiden Lane III.

The swaps served as insurance on debt securities held by financial institutions around the world. Maiden Lane III bought up the debts, making the financial institutions whole and allowing A.I.G. to tear up the swaps.

One troublesome set of swaps, worth about $10 billion, could not be torn up, because they did not insure debts that could be bought by Maiden Lane III — they insured amorphous bundles of derivatives. A.I.G. has never found a way to cancel them, and they are still in force.

The existence of these particular swaps has been controversial, because they suggest that A.I.G. and its trading partners were dealing not just in newfangled insurance, but in highly speculative bets on the real estate markets.

The Fed’s lawyer, Ethan T. James, of Davis Polk & Wardwell, deleted all references to the $10 billion in swaps that could not be torn up. He wrote in the margin: “There should be no discussion or suggestion that A.I.G. and the N.Y. Fed are working to structure anything else at this point.”

After receiving his instructions, A.I.G. deleted the reference to the $10 billion derivatives problem from its regulatory filing.

An official of the New York Fed said its reasons for telling A.I.G. not to mention the $10 billion of special swaps were innocuous. The New York Fed issued a statement by its general counsel, Thomas C. Baxter, saying it was “appropriate” to have given A.I.G. guidance on what to say in the S.E.C. filing, because the New York Fed had helped create Maiden Lane III.

“Our focus was on ensuring accuracy and protecting the taxpayers’ interests, during a time of severe economic distress,” Mr. Baxter said. “All information was in fact disclosed that was required to be disclosed by the company, showing that the counterparties received par value. There was no effort to mislead the public.”

Mr. Baxter, the general counsel, also said that while the New York Fed had offered its opinions about the filing, “the final decision rested with A.I.G. and its external securities counsel.”

Mark Herr, a spokesman for A.I.G., said that the company would not comment on the matter.

Mr. Issa, the senior Republican on the House oversight committee, said he was writing to the committee chairman, Edolphus Towns of Maryland, about including the questions of disclosure in the committee’s inquiry into the bailout.

Thursday’s controversy follows other disputes over whether the Federal Reserve was suppressing information about A.I.G. that the public had a right to know. Early in the bailout, the company and the Fed refused to name the financial institutions that were counterparties to the company’s derivatives.

The Federal Reserve’s vice chairman, Donald L. Kohn, told angry senators in a hearing that the Fed thought A.I.G. would lose customers if such information were made public, and any loss of customers would only hurt the taxpayers.

But the senators warned that unless the names were revealed, no more bailout money would be forthcoming, and not long after that, the names were made public.

The inspector general for the bailout, Neil Barofsky, said in an audit of A.I.G. that the arguments against transparency simply did not withstand scrutiny. “Notwithstanding the Federal Reserve’s warnings, the sky did not fall,” he wrote in November.

More recently, attempts by the New York Fed and A.I.G. executives to soften pay restrictions included references to the company’s condition that some thought should have been disclosed to shareholders.

The officials argued that the executives would resign if they were paid in company stock, citing projections showing that the stock might be worthless — something the taxpayers, as shareholders, might like to know — according to people with knowledge of the analysis.

Those discussions were disclosed on Sunday in an article in The New York Times Magazine.

A.I.G. did not comment. Others said that its regulatory filings stated that the company expected to be viable for more than 12 months only if the government continued its support, and that well captured the level of investor risk.

Too Big To Fail: Andrew Ross Sorkin

From Here is the City

Andrew Ross Sorkin's new book, 'Too Big To Fail', is the first real account that clearly reveals the sheer panic Wall Street was experiencing after the fall of Lehman Brothers in September last year.

Excerpts from the book are being run in Vanity Fair, and the reader is presented with a picture of pandemonium, as Wall Street CEOs, senior US government officials and regulators run around like headless chickens attempting to save Wall Street and the financial system as a whole.

And Tim Geithner (then President of the New York Fed, and now Treasury Secretary) appears to have spent much of his time aimlessly calling up firm CEOs and suggesting endless merger options, as he clearly thought that the future of the industry could only be secured if 'too big to fail' firms joined forces to become even bigger.

According to Sorkin's sources, one morning soon after Lehman went belly-up, Geithner started to write down a series of possible industry mergers, which he believed might save the system from financial armageddon - Morgan Stanley and Citi, Morgan Stanley and JPMorgan, Morgan Stanley and Mitsubishi, Morgan Stanley and CIC, Morgan Stanley and an outside investor, Goldman and Citi, Goldman and Wachovia, Goldman and an outside investor, Fortress Goldman and Fortress Morgan Stanley.

And here's a note of some of the classic telephone exchanges which are said to have occurred between the main players:

Goldman CEO Lloyd Blankfein calls Citi boss Vikram Pandit:

Blankfein (who Geithner had apparently asked to make the call): 'Well, I guess you know why I'm calling'.

Pandit: 'No, I don't'.

Blankfein: 'Well, I'm calling you because at least some people in the world might be thinking that combining our firms would be a good idea'.

Pandit: 'I want you to know I'm flattered by the call'.

Blankfein: 'Well Vikram, I'm not calling with any flattery in mind!'.

Geithner calls JPMorgan CEO Jamie Dimon about taking over Morgan Stanley

Dimon: 'You've got to be kidding me. I did Bear. I can't do this'.

Geithner: 'You'll be getting a call from John Mack'. He hangs up.

Morgan Stanley CEO John Mack, Geithner, Fed Chief Ben Bernanke and US Treasury Secretary Hank Paulson on a conference call

Geithner (to Mack): 'We've spent a lot of time working on this, and we think you need to call Jamie'.

Mack: 'Tim, I called Jamie. He doesn't want this bank'.

Geithner: 'No, he'll buy it'.

Mack: 'Yeah, for one dollar! That makes no sense'.

Geithner: 'We want you to do this'.

After some more tooing and froing, Mack: 'Well look, I have the utmost respect for the three of you and what you are doing.....But I won't do it. I just won't do it. I won't do it to the 45,000 people that work here'.

And as the crisis reached its climax, Mack was busy on the phone putting the finishing touches on a deal that would result in a $9bn cash injection into Morgan Stanley from Mitsubishi UFJ Financial. Geithner called, and was told he couldn't be put through to Mack. Paulson called and was told the same thing. Geithner then called a second time, insisting that he be connected to Mack immediately. Mack, who is said to have been minutes away from reaching agreement with the Japanese bank, finally snapped:

'Tell him to get F...ed. I'm trying to save my firm'.