This destroys the argument made by New York Fed officials (Geithner) that foreign banks (Societe Generale) were not allowed by law to accept less than full value on derivative contracts with AIG.
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(New York) -- A French regulator was willing to discuss allowing lower payments to retire American International Group Inc.’s obligations to the country’s banks, according to congressional testimony that undermines part of the rationale the Federal Reserve Bank of New York gave for paying full value.
France’s regulator was “open to further negotiations” to discuss the possibility of concessions by AIG counterparties Societe Generale SA and Credit Agricole SA’s Calyon unit, in November 2008, Neil Barofsky, the special inspector general for the Treasury Department’s Troubled Asset Relief Program, said in prepared remarks for a House oversight committee hearing today.
New York Fed General Counsel Thomas Baxter wrote to Barofsky last year that the regulator declined to demand concessions from U.S. banks partly because “it would not have been appropriate” when rivals in other nations were unwilling or “legally barred” from giving discounts.
“It appears officials at the New York Fed deceived or even lied to the inspector general regarding the French regulator’s position,” said Joshua Rosner, managing director at Graham Fisher & Co., a New York investment research firm.
AIG’s obligations had to be resolved quickly to avoid “catastrophic consequences” for the economy, Baxter said in prepared remarks for the hearing. “Taking additional time to press further for a discount was not justified.”
In his remarks, Geithner said, “everyone should realize that because of the actions of the Treasury and the Federal Reserve, the American financial system is now in a position where it can provide the credit necessary for economic growth.”
Barofsky learned subsequently that France’s Commission Bancaire was prepared to negotiate with the New York Fed, he said in today’s testimony. Previously the New York Fed told his office that the commission prohibited concessions, he said.
“The French regulators noted that such negotiations would have been unprecedented, would have likely required universal agreement among counterparties to make concessions, and would have had to be conducted in a transparent manner and at a high level, but continued negotiations were possible,” Barofsky said.
While the French regulators didn’t tell Barofsky what specific statements they made to New York Fed negotiators, they did say “they did not ‘slam the door’ to such continued discussions,” according to his testimony. Commission Bancaire spokeswoman Corinne Dromer declined to comment.