[Infowarrior] - SEC mulled national security status for AIG details

[Richard Forno]

SEC mulled national security status for AIG details
Matthew Goldstein
NEW YORK
Sun Jan 24, 2010 3:04pm EST
http://www.reuters.com/article/idUSTRE60N1S220100124

NEW YORK (Reuters) - U.S. securities regulators originally treated the  
New York Federal Reserve's bid to keep secret many of the details of  
the American International Group bailout like a request to protect  
matters of national security, according to emails obtained by Reuters.
The request to keep the details secret were made by the New York  
Federal Reserve -- a regulator that helped orchestrate the bailout --  
and by the giant insurer itself, according to the emails.

The emails from early last year reveal that officials at the New York  
Fed were only comfortable with AIG submitting a critical bailout- 
related document to the U.S. Securities and Exchange Commission after  
getting assurances from the regulatory agency that "special security  
procedures" would be used to handle the document.

The SEC, according to an email sent by a New York Fed lawyer on  
January 13, 2009, agreed to limit the number of SEC employees who  
would review the document to just two and keep the document locked in  
a safe while the SEC considered AIG's confidentiality request.

The SEC had also agreed that if it determined the document should not  
be made public, it would be stored "in a special area where national  
security related files are kept," the lawyer wrote.

In another email, a New York Fed official said the SEC suggested in  
late December 2008, that AIG file the document under seal and then  
apply to the regulatory agency for so-called confidential treatment,  
if central bankers wanted to stop the information from becoming public.

The emails were included in the mountain of documents the New York Fed  
turned over last week to the House Committee on Oversight and  
Government Reform, which will hold a hearing Wednesday into the AIG  
bailout and the New York Fed's role in trying keep the specific terms  
of that Fed-engineered rescue in November 2008, from being made public.

More than a year later, the Fed's bailout of AIG remains controversial  
because it funneled nearly $70 billion to 16 big U.S. and European  
banks that had bought credit default swaps from AIG. Banks like  
Goldman Sachs Group Inc, Societe Generale and Deutsche Bank had bought  
those insurance-like derivatives to guard against defaults on hundreds  
of securities backed by subprime mortgages.

'BACKDOOR BAILOUT'

Lawmakers on Capitol Hill have labeled the AIG bailout, in which the  
New York Fed created a special entity to purchase those securities  
from the banks at essentially their face value, a "backdoor bailout"  
for the 16 financial institutions.

The new batch of emails, along with others that have become public in  
recent weeks, reveal that some at the New York Fed had gone to great  
lengths to keep the terms of the bailout private and the SEC may have  
played a role in contributing to some of the secrecy surrounding the  
AIG rescue package.

"The New York Fed was orchestrating what can only be characterized as  
an extreme effort to ensure that details of the counterparty deal  
stayed secret," Rep. Darrell Issa from California, the ranking  
Republican on the House Oversight Committee, said through a spokesman.  
"More and more it looks as if they would've kept the details of the  
deal secret indefinitely, it they could have."

In March, some of the secrecy surrounding the AIG bailout began to  
fall away when the insurer, under pressure from Congress and the SEC,  
agreed to publicly name the 16 banks that got money in the rescue  
package and how much each received.

But AIG, largely at the prodding of the New York Fed, refused to make  
public all of the information in the controversial document,  
officially called "Schedule A -- List of Derivative Transactions,"  
according to the emails turned over by the central bank to Capitol  
Hill. AIG continued to seek confidential treatment from the SEC for  
the redacted portions of the five-page filing.

Last May, the SEC did grant AIG's request for confidential treatment  
for the remaining redacted portions of the Schedule A filing. The  
redacted parts include the CUSIP, or trading ID, number for each  
security on which AIG wrote a CDS contract, as well as the face value  
of each individual security that AIG had insured against default.

The SEC agreed to let AIG keep that information confidential until  
November 2018 -- or the 10th anniversary of the bailout. Critics  
contend that without the redacted information, it is difficult to  
determine which of the 16 banks had held the worst-performing  
securities, and which banks originated the worst of the troubled  
securities.

GEITHNER UNDER MICROSCOPE

The New York Fed has argued the information needs to remain  
confidential to enable BlackRock Inc, which manages the portfolio of  
securities bought from the banks, to compete with hedge funds on an  
even playing field.

U.S. Treasury Secretary Timothy Geithner, who has drawn fire for his  
role in the bailout, was set to testify before the House Oversight  
Committee on Wednesday. Geithner, who led the New York Fed at the time  
of the AIG bailout, has said he was not privy to the discussions about  
what information AIG should or should not release to the public and  
the SEC.

New York Fed spokeswoman Deborah Kilroe said on Friday that the more  
than 250,000 pages of documents provided by the central bank to  
Congress "demonstrate that the FBNY's actions assisted AIG in ensuring  
the accuracy of its disclosures and protected important U.S. taxpayer  
interests."

For its part, SEC has said it pushed AIG to make public the list of  
banks getting bailout money and only signed off on the request for  
confidential treatment after the insurer released that information.  
SEC spokesman John Nestor said: "The SEC required AIG to make public  
all of the information in Schedule A that was material to an investor  
in AIG."

But this latest round of emails reveals that it was an official with  
the SEC in December 2008 who recommended that AIG and the New York Fed  
could seek confidential treatment for the Schedule A document as an  
alternative to making the entire document public.

In November, a New York Fed lawyer, in another email, had said he  
thought it was "highly unlikely" the SEC would grant confidential  
treatment for the document.

AIG and the New York Fed took the SEC's advice and filed a heavily  
redacted version of the Schedule A on January 14, 2009, and at the  
same time requested confidential treatment for the redacted portions.

The emails also discuss that BusinessWeek magazine had submitted a  
Freedom of Information Act request for the document and the  
confidential treatment request was a way of dealing with that and  
other possible requests by the media for the document.

(Reporting by Matthew Goldstein; Editing by Maureen Bavdek)