Secret Banking Cabal Emerges From AIG Shadow

By David Reilly, Bloomberg Opinion

Theidea of secret banking cabals that control the country and globaleconomy are a given among conspiracy theorists who stockpile ammo,bottled water and peanut butter. After this week’s congressionalhearing into the bailout of American International Group Inc., you have to wonder if those folks are crazy after all.
Wednesday’shearing described a secretive group deploying billions of dollars tofavored banks, operating with little oversight by the public or electedofficials.

We’re talking about the Federal Reserve Bank of New York,whose role as the most influential part of the federal-reserve system-- apart from the matter of AIG’s bailout -- deserves furthercongressional scrutiny.
The New York Fed is in the hot seat forits decision in November 2008 to buy out, for about $30 billion,insurance contracts AIG sold on toxic debt securities to banks,including Goldman Sachs Group Inc., Merrill Lynch & Co., Societe Generale and Deutsche Bank AG,among others. That decision, critics say, amounted to a back-doorbailout for the banks, which received 100 cents on the dollar forcontracts that would have been worth far less had AIG been allowed tofail.

That move came a few weeks after the Federal Reserve and Treasury Department propped up AIG in the wake of Lehman Brothers Holdings Inc.’s own mid-September bankruptcy filing.

Saving the System
Treasury Secretary Timothy Geithnerwas head of the New York Fed at the time of the AIG moves. Hemaintained during Wednesday’s hearing that the New York bank had to buythe insurance contracts, known as credit default swaps, to keep AIGfrom failing, which would have threatened the financial system.
The hearing before the House Committeeon Oversight and Government Reform also focused on what many inCongress believe was the New York Fed’s subsequent attempt to cover upbuyout details and who benefited.

By pursuing this line ofinquiry, the hearing revealed some of the inner workings of the NewYork Fed and the outsized role it plays in banking. This insight isespecially valuable given that the New York Fed is a quasi-governmentalinstitution that isn’t subject to citizen intrusions such as freedom ofinformation requests, unlike the Federal Reserve.

Thisimpenetrability comes in handy since the bank is the preferred vehiclefor many of the Fed’s bailout programs. It’s as though the New York Fedwas a black-ops outfit for the nation’s central bank.

Geithner’s Bosses
TheNew York Fed is one of 12 Federal Reserve Banks that operate under thesupervision of the Federal Reserve’s board of governors, chaired by Ben Bernanke. Member-bank presidents are appointed by nine-member boards, who themselves are appointed largely by other bankers.

As Representative Marcy Kapturtold Geithner at the hearing: “A lot of people think that the presidentof the New York Fed works for the U.S. government. But in fact you workfor the private banks that elected you.”
And yet the New York Fedplayed an integral role in the government’s bailout of banks, oftenreceiving surprisingly free rein to act as it saw fit.

ConsiderAIG. Let’s take Geithner at his word that a failure to resolve theinsurer’s default swaps would have led to financial Armageddon. Giventhe stakes, you might think Geithner would have coordinated actionswith then-Treasury Secretary Henry Paulson. Yet Paulson testified that he wasn’t in the loop.
“I had no involvement at all, in the payment to the counterparties, no involvement whatsoever,” Paulson said.

Bernanke’s Denials

Fed Chairman Bernanke also wasn’t involved. In a written response to questions from Representative Darrell Issa, Bernanke said he “was not directly involved in the negotiations” with AIG’s counterparty banks.
Youhave to wonder then who really was in charge of our nation’s financialfuture if AIG posed as grave a threat as Geithner claimed.

Questions about the New York Fed’s accountability grew after Geithner on Nov. 24, 2008, was named by then-President- elect Barack Obamato be Treasury Secretary. Geither said he recused himself from thebank’s day-to-day activities, even though he never actually signed aformal letter of recusal.

That left issues related to disclosuresabout the deal in the hands of the bank’s lawyers and staff, ratherthan a top executive. Those staffers didn’t want details of the swapspurchase to become public.

New York Fed staff and outside lawyers from Davis Polk & Wardell edited AIG communications to investors and intervened with the Securities and Exchange Commission to shield details about the buyout transactions, according to a report by Issa.

Thatthe New York Fed, a quasi-governmental body, was able to push aroundthe SEC, an executive-branch agency, deserves a congressional hearingall by itself.

Later, when it became clear information would be disclosed, New York Fed legal group staffer James Bergine-mailed colleagues saying: “I have to think this train is probablygoing to leave the station soon and we need to focus our efforts onexplaining the story as best we can. There were too many peopleinvolved in the deals -- too many counterparties, too many lawyers andadvisors, too many people from AIG -- to keep a determined Congressfrom the information.”

Think of the enormity of that statement. Astaffer at a body with little public accountability and that exists toserve bankers is lamenting the inability to keep Congress in the dark.

This belies the culture of secrecy obviously pervasive within the New York Fed. Committee Chairman Edolphus Townsnoted during the hearing that the bank initially refused to discloseeven the names of other banks that benefited from its actions, arguingthis information would somehow harm AIG.

‘Penchant for Secrecy’
“Infact, when the information was finally released, under pressure fromCongress, nothing happened,” Towns said. “It had absolutely no effecton AIG’s business or financial condition. But it did have an effect onthe credibility of the Federal Reserve, and it called into question theFed’s penchant for secrecy.”

Now, I’m not saying Congress shouldbe meddling in interest-rate decisions, or micro-managing bankregulation. Nor do I think we should all don tin-foil hats and startranting about the Trilateral Commission.
Yetwhen unelected and unaccountable agencies pick banking winners whiletrying to end-run Congress, even as taxpayers are forced to lend, spendand guarantee about $8 trillion to prop up the financial system, ourcollective blood should boil.