Unnecessary Concessions Given To AIG Partners By New York Fed

There are lots of skeletons coming out of the closet regarding concessions given to American International Group’s (NYSE: AIG) trading partners by the New York Fed last year, as the government audit report came out on Monday.

The New York Fed did not negotiate well with the counterparties involved with AIG like Goldman Sachs (NYSE: GS), Societe Generale (OTC: SCGLY), Merrill Lynch (NYSE: SQD) and Deutsche Bank (NYSE: DB). The New York Fed paid the full market value for assets underlying the credit default swaps written by AIG to these banks.

The report said that in the rush to rescue AIG just two days after the failure of Lehman Brothers (OTC: LEHMQ), the New York Fed adopted terms that were based on an aborted commercial rescue effort which resulted in another bailout just weeks later.

There are criticisms of the New York Fed, headed at the time by now-U.S. Treasury Secretary Timothy Geithner, for insisting that all banks be treated equally in negotiations and that it would not treat domestic banks differently from foreign institutions.

However, defending their actions, the New York Fed and Federal Reserve Board, in a joint letter accompanying the report, said "We believe that the Federal Reserve acted appropriately in conducting these negotiations and that our negotiating strategy, including the decision to treat all counterparties equally, was not flawed or unreasonably limited."