Frank: Fed's Role in AIG 'Troubling'
By Alison Vekshin and Peter Cook
(Bloomberg) — Representative Barney Frank said the Federal Reserve Bank of New York's 2008 order to American International Group Inc. (AIG) to suppress disclosures of bank payments is "troubling" and he supports hearings on the issue.
Frank retains confidence in Treasury Secretary Timothy Geithner, who led the New York Fed at the time, he said today in a Bloomberg Television interview. The U.S. House last month passed legislation that would prevent the Fed from having the power to bail out companies such as AIG, he said.
"To the extent that there were problems in that AIG situation, we have taken steps to prevent their occurrence," said Frank, a Massachusetts Democrat and chairman of the House Financial Services Committee.
AIG, the New York-based insurer, submitted to the New York Fed a draft of a regulatory filing showing it paid banks, including Goldman Sachs Group Inc. (GS) and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference and AIG dropped the language in a December 2008 filing, e-mails between the company and the regulator show. The e-mails were obtained by Representative Darrell Issa, the top Republican on the House Oversight and Government Reform Committee.
Frank, interviewed from Newton, Massachusetts, said he has confidence in Geithner, nominated Nov. 24, 2008, by Barack Obama, then president-elect, to be Treasury secretary. He was "officially recused" from dealing with specific companies after his nomination, said Meg Reilly, a Treasury spokeswoman.
Bush Administration"This was a previous administration and he was acting not independently but as part of the Bush administration approach," Frank said.
Senator Charles Grassley, an Iowa Republican, said he would seek a Finance Committee hearing on the bank rescue, including an examination of actions disclosed in the e-mails released by Issa that led to delays in disclosing the AIG payments.
"We should look hard at whether disclosure really would have caused even more severe hardship for the rest of the country, including a run on banks and the resulting fall-out," Grassley said in an e-mailed statement. Frank said he would support congressional hearings.
The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps, or contracts tied to subprime home loans, threatened to swamp the insurer weeks after its taxpayer-funded rescue. The regulator decided Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the contracts, prompting lawmakers to call the AIG rescue a "backdoor bailout" of financial firms.
'Never Happen Again'"Did they have the authority to tell AIG to pay less than 100 percent or not?" Frank said. "That's an interesting debate. But the important point to make is that we are making sure that that debate will never happen again."
Frank said the decision by Senate Banking Committee Chairman Christopher Dodd to retire this year will have a "mildly positive effect" on advancing financial regulatory overhaul legislation in Congress.
"You're not running for re-election, you've got more time," Frank said.
Dodd's Senate Banking Committee is drafting a version of the bill without setting a schedule for legislative action.
The House last month passed legislation drafted by Frank expanding the government's authority to intervene in the operations of financial firms as an alternative to a taxpayer bailout for companies whose failure would shake the economy. The measure creates a council of regulators to monitor systemic risk, gives the Federal Deposit Insurance Corp. power to disassemble large failed financial firms and lets regulators break apart healthy firms that threaten the economy.
Glass-SteagallFrank said he supports reinstating restrictions from the Depression-era Glass-Steagall Act to separate commercial and investment banking on an individual basis. Such language is part of the House bill, he said. Reviving the law after Gramm-Leach-Bliley Act repealed the limits in 1999 would be difficult, he said.
"There are now institutions that have been formed subject to that legal authority," Frank said. "To insist that every single one of them be broken up I think would be disruptive at a time when the economy is getting better but isn't fully healed."