Tuesday, May 12, 2009

It’s troublesome that the government would take this interest and not control

TO BE NOTED: From Bloomberg:

"AIG Trustees Should Answer to Taxpayers, Not Fed, Towns Says

By Mark Pittman, James Sterngold and Hugh Son

May 12 (Bloomberg) -- A House panel plans to ask trustees assigned to safeguard the U.S. government’s $182.5 billion investment in American International Group Inc. whether their supervision by the Federal Reserve Bank of New York serves taxpayers’ interests.

The trustees -- Jill Considine, Chester Feldberg and Douglas Foshee -- were appointed in January by the New York Fed, a private institution owned by member banks, which has the power to overturn some of their decisions and to remove them. Edolphus Towns, a New York Democrat who chairs the House Committee on Oversight and Reform that will hold hearings tomorrow, said he’s concerned that the interests of AIG’s customers and trading partners may outweigh those of taxpayers.

“As a $182.5 billion recipient of taxpayer dollars, AIG should no longer be able to operate in the dark,” said Towns in an e-mail. “The American people, who now own a major portion of this company, deserve clarification on core issues of the AIG bailout -- who exactly is in charge at AIG and who is protecting the taxpayer’s multibillion-dollar investment?”

AIG is the biggest recipient of government rescue funds. Whether it can repay the money may depend on actions by the trustees, some of which must be approved by the New York Fed. The New York-based insurer has received four bailouts valued at $182.5 billion since agreeing in September to turn over about an 80 percent stake in the company to the government.

AIG Counterparties

Peter Bakstansky, a spokesman for the trustees and a former spokesman for the New York Fed, said the three are “prepared to talk about” what they have been doing since their appointment when they testify. He said the trustees speak weekly with AIG management by telephone and meet monthly in person. He declined to give further details.

Deborah Kilroe, a spokeswoman for the New York Fed, declined to comment.

The insurer’s counterparties include firms connected to the New York Fed, such as Goldman Sachs Group Inc., which has received more than $8 billion of AIG’s bailout funds to settle credit-default swaps it had with the firm. Towns’s committee plans to ask the trustees and AIG Chief Executive Officer Edward Liddy, who is also scheduled to testify, why the company didn’t try to negotiate for payments of less than the full amount.

New York Fed President William Dudley worked until 2007 as Goldman Sachs’s chief economist. Stephen Friedman, who resigned as New York Fed chairman May 7, was once CEO of Goldman Sachs and supervised the search for Dudley.

Friedman resigned from his New York Fed post after the Wall Street Journal reported that he bought 37,300 shares of Goldman Sachs last year while seeking a waiver of Fed policy that would have precluded him from sitting on the Goldman Sachs board and being New York Fed chairman at the same time. The shares have since gained $3 million in value.

‘Widening Morass’

“These programs are drawing the Federal Reserve into a widening political morass and compromising Fed independence,” said William Poole, former president of the St. Louis Fed. The Fed lending programs “ought to have legislative authorization and ought to be run out of the Treasury or some other agency of the federal government.”

Goldman Sachs CEO Lloyd Blankfein rejected calls to remove Friedman. “He is a credit to our board,” Blankfein said last week at the firm’s annual meeting in New York. Friedman said he bought the shares “because I thought Goldman Sachs stock, under tangible net worth, was at a very attractive price.”

The New York Fed is one of 12 regional Federal Reserve banks and the one charged with monitoring capital markets. It is also managing $1.7 trillion of emergency lending programs. While the Fed’s Washington-based Board of Governors is a federal agency subject to the Freedom of Information Act and other government rules, the New York Fed and other regional banks maintain they are separate institutions, owned by their member banks, and not subject to federal restrictions.

‘Right to Disclosure’

JPMorgan Chase & Co. CEO Jamie Dimon and Richard Carrion, chairman and CEO of Banco Popular de Puerto Rico, are also on the New York Fed board, along with General Electric Co. CEO Jeffrey Immelt.

“Fed resources are public resources, and taxpayers have a right to disclosure,” Poole said.

The congressional hearing will be the first public appearance for the trustees, who are under pressure from lawmakers to show they are helping to turn around the insurer. Towns said he will ask Liddy and the trustees “what they are planning to do with the company and how this plan, whether it is to liquidate or rehabilitate the company, will ensure that American taxpayers are repaid.”

Representative Darrell Issa of California, the ranking Republican on the oversight committee, said he wanted greater accountability from the trustees.

$100,000 a Year

“There is a significant and troubling lack of transparency and accountability in Treasury’s delegation of authority to an ‘independent’ trust that manages the government’s and taxpayers’ interest in AIG,” Issa said in an e-mailed statement. “The American people have a right to know how these trusts are going to be designed, how they will operate and how the trustees can be held accountable.”

The trustees were hired by the New York Fed, which pays each of them $100,000 a year, under a contract completed on Jan. 16 in the final days of the Bush administration. They wield the government’s 77.9 percent stake in AIG through a trust and control votes on asset sales, mergers and the selection of board members and top executives, according to a company filing.

The contract says the trust was created “to avoid any possible conflict” with the Fed’s supervisory and monetary- policy functions. Dudley, the New York Fed president, said in a Jan. 16 statement that the trustees “have a legally binding obligation to exercise all of their rights as majority owner of AIG in the best interests of the U.S. taxpayers.”

Approval of Fed

While the contract says the New York Fed “wishes the trustees to have absolute control over the trust stock” and that developing a divestiture plan for selling AIG shares is a key goal, it states that the trustees cannot sell the shares without the approval of the New York Fed after consultation with the Treasury Department.

Under the contract terms, the New York Fed will control any litigation. If a trustee is indicted or found “to have demonstrated untrustworthiness or to be derelict in the performance of his or her duties,” the New York Fed has the right to remove the trustee.

The agreement doesn’t define untrustworthiness or dereliction of duty.

Considine, 64, is a former chairman of the Depository Trust & Clearing Corp. and served a six-year term on the New York Fed’s board, where she was chairman of the audit and operational risk committee. She was the New York State superintendent of banks from 1985 to 1991 and is lead director of Ambac Financial Group Inc., the New York-based bond insurer whose shares have dropped 98 percent from a 2007 peak.

Feldberg, 69, a former chairman of Barclays Americas, was an executive vice president in charge of the New York Fed’s Bank Supervision Group for nine years through 2000.

Foshee, 49, was chief operating officer at oilfield- services provider Halliburton Co. before joining El Paso Corp. in 2003 as president and CEO.

‘Soft Power’

“The people appointed are long-time Fed players,” said Mark Roe, a professor at Harvard Law School in Cambridge, Massachusetts, who has written a book on corporate governance. “They’re likely to take signals from the Fed anyway, even if not obligated to.”

Steven Davidoff, a law professor at the University of Connecticut in Storrs, Connecticut, said the problem with the trust agreement is that it creates the appearance that the New York Fed is not in control of the AIG shares while allowing the Fed to maintain “soft power” over the company.

“The great value of this agreement is that it allows the government to say it doesn’t control AIG, while keeping its back-door influence over the company,” said Davidoff, who delivered a paper on the AIG rescue at a legal conference in Philadelphia last week. “This gives the government a sort of plausible deniability in this situation.”

“It’s troublesome that the government would take this interest and not control,” because it clouds the question of accountability, Davidoff said.

To contact the reporters on this story: Mark Pittman in New York at mpittman@bloomberg.net or; James Sterngold in Los Angeles at jsterngold2@bloomberg.net; Hugh Son in New York at hson1@bloomberg.net."

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