(Washington, DC) – Judicial Watch announced today that on July 18, 2012, it filed a Freedom of Information Act (FOIA) lawsuit (Judicial Watch v. Board of Governors of the Federal Reserve System (No. 1:12-cv-01175)) against the Board of Governors of the Federal Reserve System (the Board) seeking records related to the government bailout of American International Group, Inc. (AIG). Judicial Watch filed its lawsuit on behalf of Vern McKinley, a former employee of the Board of Governors of the Federal Reserve and the Federal Deposit Insurance Corporation and author of Financing Failure: A Century of Bailouts.
Judicial Watch seeks the following records pursuant to its original May 15, 2012, FOIA request: “Copies of any and all records of the Board located at the [Federal Reserve Bank of New York] concerning, regarding, or relating to the proposition that ‘the disorderly failure of AIG was likely to have a systemic effect on financial markets that were already experiencing a significant level of fragility.’ Such records include, but are not limited to…detailed meeting minutes, meeting notes, supporting memoranda, communications, and electronic messages and attachments.”
The Board acknowledged receiving Judicial Watch’s request on May 15, 2012, and requested a 10-day extension to respond. A response was due by June 27, 2012. However, as of the date of Judicial Watch’s lawsuit, the Board failed to respond in accordance with FOIA law.
On September 16, 2008, the Board decided to extend an initial $85 billion loan to insurance giant AIG, which it claimed “faced the imminent prospect of declaring bankruptcy.” According to minutes from the September 16, 2008, meeting: “Board members agreed that the disorderly failure of AIG was likely to have a systemic effect on financial markets that were already experiencing a significant level of fragility and that the best alternative available was to lend to AIG to assist it in meeting its obligations in an orderly manner as they came due…” According to CNN, the total cost committed to AIG was $182 billion.
The Board’s contention – that the failure of major corporations would spread a contagion throughout the financial system – has been used repeatedly to justify the bailouts. However, to date, the government has no evidence to support this contention. Judicial Watch, meanwhile, has launched a comprehensive investigation to determine under what legal authorities and lawful rationales the federal government initiated the Wall Street bailouts and has filed a number of lawsuits on behalf of Mr. McKinley.
“We are now trillions of taxpayer dollars into these financial bailouts and the government refuses to answer basic questions about the government’s radically intrusive response to the financial crisis,” said Judicial Watch President Tom Fitton. “The American people are tired of the Obama administration’s stonewalling and they want answers. The Fed should obey Freedom of Information Act law and respond immediately.”
With respect to the AIG bailout, Judicial Watch previously uncovered documents showing that the government did not expect taxpayers to recover their “investment” in AIG. For example, Judicial Watch uncovered a series of presentation slides detailing the terms of the AIG bailout. Included among the items is a slide entitled “Investment Considerations.” On the slide the words, “The prospects of recovery of capital and a return on the equity investment to the taxpayer are highly speculative” are crossed out by hand.
On February 25, 2010, Judicial Watch also filed a FOIA lawsuit against the Obama Treasury Department to obtain documents regarding meetings involving Kenneth Feinberg, special master for executive compensation under the Troubled Asset Relief Program (TARP); AIG Chairman Robert Benmosche; and New York Federal Reserve Bank President William Dudley. Feinberg, also known as the Obama administration’s “pay czar,” is the federal official responsible for setting compensation guidelines for the seven largest firms, including AIG, using funds from TARP.
In March 2009, AIG disbursed $165 million in taxpayer-funded TARP funds to its top executives, prompting a massive public backlash. Obama officials reportedly lobbied Congress to insert legislative language allowing the AIG bonus payments and then apparently lied about their knowledge of the payment scheme. As then-head of the New York Federal Reserve, current Treasury Secretary Timothy Geithner helped craft the original AIG deal.
FDIC Board member cautions Treasury officials during meeting to “avoid ‘selective creativity’ in determining what constitutes systemic risk”; Records released after Court ruled FDIC “has not fulfilled its obligations under FOIA”
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- FDIC Board Meeting Minutes from approval of Citigroup bailout (November 23, 2008):According to the minutes from the meeting, government officials described in vague terms the consequences of allowing Citigroup to fail, including “the effects on money market liquidity could be expected on a global basis,” “term funding markets remain under considerable stress” and the fact that it would “significantly undermine business and household confidence.” One FDIC Board member who was in attendance, John Reich, cautioned Federal bank regulators and the Treasury Department to “avoid ‘selective creativity’ in determining what constitutes systemic risk and what does not and what is possible for the government to do and what is not.”
- FDIC Board Meeting Minutes from approval of Bank of America bailout (January 15, 2009):According to the meeting minutes, Sheila Bair, Chairman of the Board of the FDIC, admitted the agency “was relying on data analysis by the Federal Reserve” and for that reason the FDIC “very much needs to proceed with a systemic risk determination with respect to [Bank of America].” Chairman Bair characterized the decision to bail out Bank of America as demonstrating that the FDIC, an independent agency, was a “team player along with the Federal Reserve and the Treasury to prove the systemic risk case.” These meeting minutes are consistent with a separate report by the Special Inspector General for the Troubled Asset Relief Program released on January 13, 2011. According to the report, Chairman Bair admitted: “We were told by the New York Fed that problems would occur in the global markets if Citi were to fail. We didn’t have our own information to verify this statement, so I didn’t want to dispute that with them.”
Regarding consequences of allowing Bank of America to fail, the arguments noted in the meeting minutes were similar to those articulated during the Citigroup meeting and included the general observation that “both financial stability and overall economic conditions would be adversely affected, and that staff believes the consequences could extend to the broader economy.”Judicial Watch also obtained meeting minutes and a FDIC memo regarding the agency’s Temporary Liquidity Guarantee Program, which represented a radical expansion of the FDIC’s power, allowing the agency to go well beyond the narrow scope of its lending authority. To justify this expansion of power, both documents reference a “recent study” by the FDIC on the effect of a run on uninsured deposits and its impact on economic activity. However, to date, this report has not been released to the American people, despite the fact that it is within the parameters of Mr. McKinley’s FOIA request. This program continues to insure about $265 billion dollars in debt.Judicial Watch filed its FIOA lawsuit on behalf of Mr. McKinley on March 15, 2010, as part of its comprehensive investigation to determine under what lawful rationales the federal government initiated these financial bailouts. Judicial Watch seeks records related to the FDIC’s decision to guarantee $306 billion of loans and securities held by Citigroup Inc., and $118 billion held by Bank of America. On April 15, 2010, the FDIC provided 101 pages of heavily redacted documents without providing sufficient justification for withholding the information and then filed a motion to dismiss the lawsuit.On December 23, 2010, while noting the fact that the FDIC “has not fulfilled its obligations under FOIA,” a federal judge rejected the FDIC’s motion to dismiss and ordered the agency to either conduct another search for documents or demonstrate why these documents should be withheld.“These documents point to three very disturbing truths about these bailouts: The government’s justification for the bailouts was weak. The decision was rushed. And it appears that the FDIC, while conducting no analysis of its own, merely bowed to pressure from Treasury to accept the bailout scheme. No wonder it took two years and a lawsuit for Judicial Watch to force the Obama administration to release these documents,” said Judicial Watch President Tom Fitton. “These documents confirm the concerns of the majority of Americans who believe the financial bailouts were unjustified and corrupt expansions of government power.”