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06 Nov 09

New York Fed’s Secret Choice to Pay for Swaps Hits Taxpayers

The Federal Reserve, after conferring in secret with investment banks, agreed to cover all of their losses with taxpayer money. This is how government works in the real world.

www.bloomberg.com/...news - Preview

AIG credit default swap CDO New York Federal Reserve Fed bank Goldman Sachs Timothy Geithner finance crisis government politics

Habayeb, 37, was chief financial officer for the AIG
division that oversaw AIG Financial Products, the unit that had
sold the swaps to the banks. One of his goals was to persuade
the banks to accept discounts of as much as 40 cents on the
dollar, according to people familiar with the matter.
After less than a week of private negotiations
with the banks, the New York Fed instructed AIG to pay them par,
or 100 cents on the dollar. The content of its deliberations has
never been made public.

The New York Fed’s decision to pay the banks in full cost
AIG -- and thus American taxpayers -- at least $13 billion.
That’s 40 percent of the $32.5 billion AIG paid to retire the
swaps. Under the agreement, the government and its taxpayers
became owners of the dubious CDOs, whose face value was $62
billion and for which AIG paid the market price of $29.6
billion. The CDOs were shunted into a Fed-run entity called
Maiden Lane III.
1 more annotations...
- The deal contributed to the more than $14 billion that over
  18 months was handed to Goldman Sachs, whose former chairman,
  Stephen Friedman, was chairman of the board of directors of the
  New York Fed when the decision was made.