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Paper Trail Shows the N.Y. Fed Asked AIG to Cover Up Bailout Details

A newly disclosed "Schedule A" details the $62.1 billion in credit-default-swap (CDS) insurance-style transactions that brought AIG down, thereby revealing the underlying machinations of Goldman Sachs (GS), Merrill Lynch, Deustche Bank (DB) and others. Although parts of Schedule A have been disclosed piecemeal, what we've learned for the first time is precisely who created the garbage securities insured by AIG, who initially profited from them and who knew just how bad the securities were.Surprise! The same banks that created the securities were among the major recipients of AIG's "insurance" payments when those securities went bad. Goldman originated the largest chunk at $17.2 billion (28% of the total), and Goldman, Merrill and DB combined accounted for 64% of the rotten securities. How bad were they? The newly complete Schedule A shows that some had losses exceeding 75%. These banks' heads-we-win-tails-you-lose dealmaking has been described as akin to "selling a car with faulty brakes and then buying an insurance policy on the buyer" of the car.

Bloomberg Markets' April issue, as previewed by BusinessWeek and discussed below, lays out the role of the New York Federal Reserve in keeping those details secret until now:

The History of Schedule A

In November 2008, AIG prepared a regulatory filing and attached Schedule A. But a lawyer from the N.Y. Fed told AIG Schedule A didn't need to be included, so AIG removed it. Then on December 24, 2008, AIG made another filing which, at the N.Y. Fed's request, did not name the banks getting the CDS payments.

Twice, in response to Congressional inquiries, AIG submitted heavily redacted copies of Schedule A. The first version, in March 2009, showed who AIG gave taxpayer money to in order to honor the "insurance" contracts, but did not specify how much money was involved. A couple of months later, Schedule A was updated to show who got how much, and revealed that the biggest payments went to Societe Generale ($16.5 billion), Goldman ($14 billion), and then Merrill and DB. But neither version showed who created the underlying securities or how well -- rather, how badly -- those securities were performing.

As recently as January 27 of this year, the N.Y. Fed told Congress the details of Schedule A should be kept secret, claiming that disclosure would hurt the value of the garbage securities, which are now held by the Fed. The argument wasn't persuasive, and the Congressional Committee released the full document.

Covering Up the Payment of 100% of the CDS/Insurance Contracts Face Value

According to the Bloomberg article, while AIG was negotiating with Goldman et al., trying to get the banks to take less than 100 cents on the dollar for the insurance-like payments, the N.Y. Fed intervened and "ordered" AIG to pay full value. The N.Y. Fed then asked AIG to delete a sentence from its December 2008 filing that stated full value was being paid. The N.Y. Fed has recently defended this deletion by saying technically the payments were slightly less than full value. Of course, that defense is hollow since the Fed asked for a deletion, not a correction to 98% or whatever number the Fed thought accurate.

Why Is the N.Y. Fed Covering Up for Goldman et al.?


As I've discussed before, the Federal Reserve has sided with the banks instead of the taxpayer on all things bailout-disclosure related, but this seems to be a whole new level of secrecy. The newly revealed details are damning from the perspective of Goldman et al., and, with regard to the 100 cents on the dollar payments, the N.Y. Fed itself, but what's the public policy justification for secrecy here?

And in the Business of Law...


Howrey profits plunge, while Arnold & Porter's numbers were slightly up as were those at Patton Boggs. Northwestern University School of Law sent more graduates to Big Law than any other (Yale didn't make the top 10).

Also, is it enough of a conflict to void a death sentence if the judge in the case was sleeping with the prosecutor? The Texas Court of Criminal Appeals told the convict: We won't decide, because you raised the issue too late. The convict has now asked the Supreme Court to weigh in, though no word yet on whether it will.

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