UPDATE 1-NY Fed failed to negotiate AIG concessions-audit

WASHINGTON, Nov 16 (Reuters) - The Federal Reserve Bank of New York used a weak negotiating strategy that failed to wring concessions from AIG trading partners last year, allowing them to reap nearly $30 billion in payments from U.S. taxpayers, a government audit report said on Monday. The New York Fed had little room to maneuver after bailing out American International Group in September but failed to use what leverage it had when it later cut a deal with AIG counterparties, according to the report by the Troubled Asset Relief Program's special inspector general. This resulted in the New York Fed paying full market value for assets underlying credit default swaps written by AIG to banks such as Goldman Sachs, Societe Generale, Merrill Lynch and Deutsche Bank, the report said. "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," TARP Inspector General Neil Barofsky said in the report. Barofsky also criticized the New York Fed, headed at the time by now-U.S.

Treasury Secretary Timothy Geithner, for insisting that all banks be treated equally in negotiations and that it would not treat domestic banks differently from foreign institutions. The New York Fed and Federal Reserve Board, in a joint letter accompanying the report, said that the terms of their $85 billion bailout to AIG were appropriate given the severity of the crisis at the time and defended their efforts to obtain concessions from AIG counterparties. "We believe that the Federal Reserve acted appropriately in conducting these negotiations and that our negotiating strategy, including the decision to treat all counterparties equally, was not flawed or unreasonably limited," the letter said. (Reporting by David Lawder; Editing by Phil Berlowitz) Keywords: FINANCIAL BAILOUT/AIG ([e-mail]; [phone]; Reuters Messaging: [e-mail]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

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