The Federal Reserve failed to completely account for its authority to conduct the 2008 rescue of American International Group Inc. (AIG), congressional investigators said.
While the Fed wasn’t required to document its interpretation of the law allowing lending to non-banks under “unusual and exigent circumstances,” the Fed’s analysis of the authority for the AIG bailout “was absent in some cases and incomplete in others,” the Government Accountability Office said in an audit report today.
The Fed’s $85 billion loan to AIG, one day after Lehman Brothers Holdings Inc. filed for bankruptcy, was part of the central bank’s use of emergency powers during the financial panic to bail out companies and create broader aid programs. Congress in 2010 removed the Fed’s ability to bail out an individual company.
Fed General Counsel Scott Alvarez, in a response included with the GAO’s report, said the investigation “shows how the Federal Reserve was successful in safeguarding the taxpayer’s investment while it worked with Treasury and the company to stabilize AIG and minimize disruption to the economy as a whole.”
Alvarez’s letter to the GAO didn’t discuss the legal analysis of the rescue authority. David Skidmore, a Fed spokesman, said today the central bank welcomes the GAO’s recommendations. “It is important to recognize that the GAO found that the Federal Reserve acted within its authority in providing emergency assistance to AIG,” Skidmore said in a statement.
Fed officials were cited in the report as saying that emergency loans under section 13(3) of the Federal Reserve Act “by nature are done on a fast, emergency basis” and that the central bank “does not assemble and maintain documentary support” for the authorizations. The GAO acknowledged the speed and emergency basis of the actions and the law “had no documentation requirements,” Skidmore said.
The GAO’s 152-page report, which took about 19 months to complete, also said easing time pressures could have aided the process of finding private investors or lenders; regulators should better monitor disputes over collateral; and that more- sophisticated stress-testing of companies would be beneficial.
The GAO said the Fed didn’t have documentation showing the AIG loan from the New York Fed was secured to its satisfaction or how interest rates were determined on other loans that were part of the rescue. For another program that was part of the rescue, “there was no documentation that AIG was, in fact, unable to secure adequate credit from other banking institutions,” the GAO said.
In July, the GAO recommended the Fed adopt a process for “documenting, to the extent not otherwise required by law, its justification for each use” of the emergency lending authority.
Goldman Sachs Group Inc., Societe Generale SA and Deutsche Bank AG were among banks that received 100 cents on the dollar on more than $60 billion in contracts with AIG protecting them from declines in the value of mortgage-related assets.
The New York Fed funded a facility called Maiden Lane III in November 2008 after the bailout two months earlier was insufficient to stabilize the insurer. Today’s GAO report said Fed officials wanted to complete the transaction before the insurer announced its third-quarter loss. By reducing AIG’s risk of losses on the securities, the Fed helped avert credit downgrades that may have led to further collateral calls from the insurer’s counterparties.
A 2009 report from Neil Barofsky, then-special inspector for the Troubled Asset Relief Program, said the Fed made “limited efforts” over two days in November 2008 to negotiate discounts from AIG’s counterparties.
The Fed “made several policy decisions that severely limited its ability to obtain concessions,” including telling the banks that participation in talks was voluntary, Barofsky said. The Fed also opted not to use its “considerable leverage” as regulator of some of AIG’s counterparties to force them to accept so-called haircuts, he said.
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