GAO details Fed’s efforts to save AIG

{mosads}According to the study, the Fed became aware of AIG’s troubles about a year before it first extended aid in September 2008. As the insurance company’s situation worsened, it struggled to line up private financing that could have eliminated the need for the government to save it. As private investors backed away from the flailing company, the Fed stepped in and began discussing a number of paths forward, including bankruptcy.

After AIG officials opted for federal assistance over bankruptcy proceedings, Fed officials maintain they had little time in a troubled market to weigh multiple options, as they rapidly set up a revolving credit facility to help keep AIG afloat with multiple loans.

Protecting the company’s credit rating was a top priority, as a downgrade would have required AIG to meet new liquidity demands that would have made the bad situation worse, the report stated.

The report also details the Maiden Lane III, a special-purpose vehicle designed to allow the Fed to loan funds to buy up collateralized debt obligations from companies that had purchased credit default swaps from AIG to protect those assets. As the Fed vehicle bought up those obligations, the companies agreed to end the swaps, which were weighing down AIG. The Federal Reserve Bank of New York, which set up the vehicle, defended it to the GAO, calling it the “only option available given constraints at the time.”

However, the GAO found that while the plan was initially approved with the understanding that certain concessions would be made by private parties, the Fed bank only made varying attempts to obtain any concessions. Fed officials argued they had “little bargaining power” and would have struggled to get everyone to agree to a discount.

While the Fed has come under heightened scrutiny from members of Congress for its widespread and sometimes secretive moves during the financial crisis, the GAO found that it was not required to — and didn’t — fully justify the authority used to make its moves. The New York Fed ban did not direct AIG on what to disclose, except for the parts involving federal aid. The bank also granted a number of conflict-of-interest waivers to employees working on saving AIG.