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.
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.
