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Lawmakers Seek Fed Audit for Mishandling AIG Bailout

AP
Wednesday, 18 Nov 2009 | 1:40 PM ET

A group of House Democrats are stepping up demands for greater transparency from the Federal Reserve after reports that the Fed mishandled the bailout of insurance giant American International Group.

CNBC.com

The group, led by Rep. Elijah Cummings, D-Md., wants a congressional review of the Federal Reserve system. They want to allow congressional audits of the Fed as part of financial rules being debated by the House Financial Services and Senate Banking committees, according to a letter Wednesday to the committees' chairmen.

"Real financial regulatory reform cannot occur without an examination into the structure" of the Federal Reserve system, the letter says.

Details on which banks benefited from AIG's bailout never would have become known without demands from Congress, and a recent report shows flaws in the Fed's structure as a regulator, the lawmakers write.

The letter follows sharp criticism Monday of the Federal Reserve Bank of New York and Federal Reserve in a report from Neil Barofsky, the special inspector general for the $700 billion financial bailout fund. Barofsky said the Fed may have paid billions more than necessary to banks including Goldman Sachs and Merrill Lynch, now part of Bank of America , to cancel AIG's contracts with them.

Treasury Secretary Timothy Geithner, then president of the New York Fed, signed off on decisions that weakened the government's bargaining position and made it difficult to pay the banks less than face value for securities AIG had insured, the report says.

The government has committed up to $180 billion to rescue AIG. Few expect all the money to be recovered. The Treasury Department now owns nearly 80 percent of the New York-based company and is trying to wind down its operations.

Treasury and Fed officials argue that taking a tougher line with AIG's business partners would have rattled financial markets already in crisis. They say AIG's failure shows the need for new financial rules proposed by the Obama administration that would make it easier to wind down large failing financial companies.

In the lawmakers' letter, they question the Fed's effectiveness as a regulator and say there is an "inherent conflict" in the way regional bank presidents are selected. The presidents of the 12 regional Fed banks are elected by boards that include representatives of banks that the Fed regulates.

Many in Congress have long demanded more transparency from the Fed. Those calls have intensified since the financial crisis erupted last fall.

Fed officials have resisted calls for a review of the central bank's governance. They contend that the Fed already is accountable except in the narrow area of monetary policy, where they say public scrutiny would threaten its independence.

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