Bloomberg Punctures the Fed’s French Excuse

Bloomberg advances the AIG/French-banks story today quite a little bit. That’s the one where the Fed said it had to pay 100 percent on those toxic swaps because the banks said they would be violating French law if they settled for anything less.

Well, well, well! It turns out two French banks, including Societe Generale, one of the AIG counterparties, did just that the same month. And they got a whole lot less than a hundred cents on the dollar:

French law didn’t stop Societe Generale and BNP Paribas SA from taking $1 billion to settle $3.5 billion of trades the same month with New York-based bond insurer Ambac Financial Group Inc., according to three people familiar with the matter. Ambac’s ability to negotiate a discount while the central bank of the world’s biggest economy didn’t adds another question for lawmakers as they examine the most contentious transaction of the government’s bailout of the U.S. banking system.

Yes it does. Unbelievable.

This is good timing on this story. We pointed to Dennis Berman’s good column in the Journal the other day and wrote that the issue had “been pretty well ignored.” No longer.

It’s kind of amusing to see the Fed wiggle around on this one. Bloomberg points to the ridiculous parsing that it’s doing on this issue:

A statement posted by the New York Fed on its Web site yesterday said that “it is not in fact precisely accurate that counterparties received 100 percent” payments. The regulator also said in the statement that “the counterparties received essentially par value,” or the full amount owed. The banks were paid $61.9 billion for securities with face value of $62.1 billion, or 99.7 percent, according to the Web site.

Well, that makes things $200 million better—out of $62,100 million. Since 99.7 percent rounds up to 100 percent, we’ll stick with the round number.

And Bloomberg is good to throw in a reminder of one of its earlier scoops:

AIG tried to persuade its counterparties to accept payments of 60 cents on the dollar before the New York Fed took over negotiations, according to people familiar with the matter.

Tim Geithner has said (to an inspector general) that “the financial condition of the counterparties was not a relevant factor.” But if it wasn’t clear a few months ago, it’s beyond clear now that the Fed didn’t want to negotiate the counterparties down. Why not?

Question number one for Geithner, whom Bloomberg helpfully points out is testifying before Congress next week, ought to be to explain that and to justify his statement to the SIGTARP.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.