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Calls grow for inquiry into Fed role in AIG issue

The head of the House of Representatives Oversight Committee, Rep. Edolphus Towns of New York, said the subpoena to the New York Fed "will provide the committee with documents that will shed light on how and why taxpayer dollars were used for a backdoor bailout."

Timothy Geithner headed the New York Fed until being nominated in late 2008 by President Obama to become Treasury Secretary. Lawmakers are waiting for Treasury to say whether Geithner will testify on the AIG issue next week.

Separately on Tuesday, Republican Senator Jim Bunning of Kentucky, a member of the Senate Banking Committee, said an email exchange released on January 7 that showed the New York Fed advised American International Group Inc to withhold information about its derivatives counterparties from its Securities and Exchange Commission filings raised serious issues.

"Because the information withheld appears to be material information about the financial condition of AIG and the value of the company, these actions may constitute a serious violation of the securities laws," Bunning said in a letter to SEC Chairman Mary Schapiro.

The SEC declined to comment.

Bunning said the regional Fed bank's actions "are likely to have caused and continue to cause losses to private investors and undermine the credibility of the U.S. financial and securities markets."

The email exchange continues to stir controversy, especially in an atmosphere of public anger about the fact big banks that got taxpayer-supplied bailouts are getting ready to award their executives with big bonuses.

Many banks have paid back their bailout money but that has not appeased taxpayers who still face tight credit and a weak market while bankers award themselves bonuses.

They show AIG initially proposed disclosing to the SEC in early December 2008 that it would pay counterparties 100 cents on the dollar to liquidate credit default swaps it sold them.

AIG received a $180 billion bailout from the government.

Its decision to pay Goldman Sachs Group Inc, Societe Generale AG and other global banking firms in full with taxpayer funds was not disclosed by AIG until March 2009, when it announced a $93 billion payoff that stoked public rage over the bailout.

The email exchange between lawyers for the New York Fed and AIG made public earlier this month implied that the regional Fed bank pressured AIG to limit disclosure about the payments.

Geithner was president of the New York Fed last year but had become the U.S. Treasury secretary by March 2009 and he allowed AIG to pay $165 million in bonuses to top executives of the division that nearly caused its collapse.

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