The Federal Reserve has asked the US Government’s audit arm to investigate the central bank’s bailout of AIG in the hope of defusing growing criticism of the $182 billion (£111 billion) rescue.
Ben Bernanke, the Fed Chairman, wrote to the Government Accountability Office to ask that it conduct a “full review” of all aspects of the Fed’s involvement in AIG’s bailout in 2008 “to provide a comprehensive response to questions that have been raised by members of Congress”.
The House Oversight Committee is investigating the bailout, under which the Federal Reserve Bank of New York (FRBNY) allowed AIG to spend $27.1 billion to pay in full its counterparties on billions of dollars of credit default swaps.
Neil Barofsky, the Special Inspector-General of the Troubled Asset Relief Programme, has since argued in a report into the bailout that the FRBNY could have pressured the counterparties, which included Goldman Sachs and Merrill Lynch, to take a haircut on the amounts they were owed by AIG.
Other critics have accused the Fed of using AIG’s payouts to counterparties as “backdoor bailout” designed to secretly save the banks from collapse.
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The issue is particularly embarrassing for the Government because Timothy Geithner, now the Treasury Secretary, led the FRBNY at the time of the bailout.
The House committee has asked former Treasury Secretary Hank Paulson and Stephen Friedman, a Goldman Sachs board member who chaired the FRBNY at the time of the bailout, to testify at a January 27 hearing into the AIG payments.
Mr Geithner, who has also been accused of asking AIG not to disclose the names of counterparties it paid as part of the bailout, is expected to testify at the hearing, as is Mr Barofsky.
The hearing comes at a delicate time for Mr Bernanke, who is waiting for the Senate to confirm his second term as Fed Chairman.
The Senate could vote on Mr Bernanke, whose term runs out at the end of this month, as early as Friday.