Audit Finds Fed Failed To Use Its Leverage in AIG Bailout
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A government audit found that the Federal Reserve Bank of New York gave into the demands of trading partners of AIG (NYSE: AIG) that they be paid in full for the complex securities that they had insured by the company.
The move by the New York Fed will save the large potential losses of the world's largest banks according to a government audit.
The audit that was conducted by the special inspector general for the Troubled Asset Relief Program, found that the New York Fed was not using its leverage as the regulator of these banks to get them a lower price on the credit-market bets. These bets were associated with the failing mortgage linked securities that have descended rapidly in value.
The resulting impact of the New York Fed not using what leverage it had at the time was having to pay full market value for the credit default swaps that AIG had written to partner banks.
The Associated Press reported that one and possibly more of the AIG partner banks offered to cancel the contracts for less, inferring that officials may have spent billions more than was needed in order to cancel debt insurance contracts with the banks.
"The refusal of the FRBNY and the Federal Reserve to use their considerable leverage as the primary regulators for several of the counterparties, including the emphasis that their participation in the negotiations was purely 'voluntary' made the possibility of obtaining concessions from those counterparties extremely remote," Neil Barofsky, the special inspector general, said in the report.
According to Herbert Allison, the Treasury assistant who heads TARP, the federal government needs to use better tools to deal with the inevitable failure of a large institution in situations like the one that faced the nation last fall.
Shares for AIG are up to $36.24 in early action, versus yesterday's close of $35.81.
Link to the Full Government Audit
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