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AIG bank payments to face closer scrutiny

The American International Group Inc. (AIG) headquarters stands in New York. AIG will face closer scrutiny over bank payment concerns.

NEW YORK (Bloomberg) - American International Group Inc.'s (AIG) payments to banks face closer congressional scrutiny after a House Republican requested records to review whether the Federal Reserve Bank of New York quashed the insurer's effort to pay less than 100 percent on derivative contracts.

The New York Fed and AIG were asked by Representative Darrell Issa to provide documents tied to the decision to settle $62 billion in credit-default swaps without imposing a "haircut" on the banks. Mr. Issa, the ranking member of the House Oversight and Government Reform Committee, requested e-mails, phone logs and term sheets in letters on Friday.

Banks may have been overpaid by $13 billion last year because the Fed scuttled attempts by AIG to secure discounts, people familiar with the matter have said. AIG, once the world's largest insurer, was bailed out in September 2008 after running short of cash because of swaps it sold that required the insurer to compensate banks for declines in mortgage-linked assets.

The payments may "amount to nothing less than a backdoor bailout of AIG's creditors", the California Republican said in the letters, citing an October 27 Bloomberg article about the New York Fed's role in settling AIG's obligations. There are "serious questions about the transparency, accountability and wisdom of the New York Fed's actions".

Goldman Sachs Group Inc., Societe Generale SA and Deutsche Bank AG were among AIG's biggest trading partners on the $62 billion book of swaps retired in part with funds from the New York Fed. New York-based Goldman Sachs got more than $14 billion over 18 months, while Paris-based Societe Generale was paid $16.5 billion and Frankfurt-based Deutsche Bank got $8.5 billion.

The Issa letters were addressed to William Dudley, president of the New York Fed, and AIG CEO Robert Benmosche. Timothy Geithner, now Treasury secretary, was in charge of the New York Fed when it took over AIG's negotiations with banks late in the week of November 3, 2008. Less than a week later, AIG announced a plan to retire the derivatives.

Mark Herr, a spokesman for New York-based AIG, and Jack Gutt of the New York Fed declined to comment.

Representative Edolphus Towns, the New York Democrat who heads the oversight panel and has authority to issue subpoenas for documents, "became increasingly concerned about counterparty payments once the committee began looking into AIG earlier this year", according to a statement from his office.

Asked about Issa's letters, a spokeswoman for Towns said he plans to hold a hearing next month with the inspector general for the Troubled Asset Relief Programme who is reviewing whether AIG paid more than necessary to the banks. The committee asked in April for the audit by Neil Barofsky, the inspector general.

Mr. Issa is seeking e-mails and meeting notes of Elias Habayeb, who was chief financial officer for the AIG division that oversaw the swaps and led efforts to get the banks to accept haircuts. He also wants documents from Geithner, former New York Fed chairman Stephen Friedman, general counsel Thomas Baxter and Sarah Dahlgren, a senior vice president in charge of the team managing AIG, Issa said on Friday in a statement.

"All of this begs the question why the New York Fed would not drive a better bargain for the American taxpayer," Mr. Issa said.

The contracts were settled at full price because, after the government rescue, AIG could not use the threat of bankruptcy to compel banks to accept discounts, Mr. Baxter told the Washington Post this week.

Mr. Issa also wants records about any efforts made to disclose details about counterparty payments in regulatory filings. The Fed pressured an AIG employee to limit what was made public, according to one of the people familiar with the matter. Mr. Baxter said in the Washington Post article that "our position has always been if your securities lawyer says it is necessary for AIG to make a particular filing, that's what AIG must do".

AIG disclosed the names of its counterparties in a March 15 statement after Fed vice-chairman Donald Kohn testified earlier that month that doing so would harm AIG's ability to do business.

The insurer said it released the information to uphold a "high degree of transparency with respect to the use of public funds".