The Federal Reserve Bank of New York failed to exercise existing powers to force the American International Group Inc.'s creditors to accept losses as the insurance giant threatened to collapse last year, according to a new oversight report.
Neil M. Barofsky, the inspector general for the Troubled Asset Relief Program, harshly criticized the bank - then led by current Treasury Secretary Timothy Geithner - for having "refused to use its considerable leverage" to negotiate down AIG's obligations to counterparties demanding payment on housing-related investment products.
The counterparties included some of the nation's largest financial institutions. Among the largest were Merrill Lynch, UBS, Bank of America Corp., and Goldman Sachs. In total, AIG's creditors received full payment of more than $62 billion.
At the time, AIG was threatening to go into bankruptcy. In his report, Barofsky said that the perception that the government would not allow AIG to fail allowed the counterparties to present a strong front in demanding full satisfaction of the debts.
This understanding was supported by Geithner's erroneous belief that he was unable to force the counterparties to accept "haircuts," or discounts on the amount due, Barofsky said.
According to the report, Geithner's Federal Reserve, having already extended $85 billion in credit earlier in the year, considered itself a creditor of AIG and thus had trouble adopting its role as regulator. In addition, the Fed believed that the law prevented it from asking concessions of foreign-owned banks and it did not want to treat them differently than domestic ones.
UBS was the only financial institution to offer to take a haircut, Barosfky reported. He said the company offered to take 98 cents on the dollar, but only if the other leading counterparties agreed. When they failed to do so, UBS withdrew its offer.
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