Fed Calls Consultants to Treat AIG, Stricken Markets

Feb. 6 (Bloomberg) — Every Sunday night, New York bankruptcy lawyer Marshall Huebner spends a 13-hour shift on call as an emergency medical technician. His day job involves work on another sort of rescue: The government’s $152.5 billion bailout of American International Group Inc.

“There’s a stronger parallel than you would think,” Huebner, a partner at Davis Polk & Wardwell, said in an interview. Helping resuscitate the insurance giant takes “a lot of the same qualities that I think stand you in very good stead with emergency medicine — the ability to remain calm in almost any situation, and the ability to assess, triage and treat, even in a crisis.”

Huebner, 41, is part of an army of outside lawyers and consultants the Federal Reserve has called upon to help fight the biggest financial crisis in 70 years. While the central bank won’t disclose how much work it has outsourced, Fed watchers say the institution is relying on Wall Street experts to an unprecedented extent, seeking help from insiders in the very industries where the turmoil originated.

“I don’t think the Fed has seen anything like this,” former New York Fed general counsel and AIG executive Ernest Patrikis said in an interview. “AIG just got so complex in terms of private corporate matters that you just need that outside expertise.” Patrikis is now with the law firm of White & Case in New York.

In addition to hiring consultants, the Fed and the Treasury have retained Wall Street firms to help manage more than $2 trillion in bailout and emergency-loan programs.

Pimco, JPMorgan

Pacific Investment Management Co. runs a $259 billion program to backstop the commercial-paper market. BlackRock Inc., Goldman Sachs Asset Management, Pimco and Wellington Management Co. are managing the Fed’s purchases of up to $500 billion of mortgage-backed securities. JPMorgan Chase & Co. oversees a separate program under which the Fed may lend up to $540 billion to support money market mutual funds.

Morgan Stanley is also advising the Fed on the AIG rescue.

Last month, the House passed conditions for releasing the remaining $350 billion of financial-rescue funds, including a requirement that the Fed give details of the contracts and selection process for the mortgage-backed securities purchase program’s managers. The Senate isn’t planning to take up the legislation.

BlackRock is also managing and selling assets acquired in the Fed’s $29 billion rescue of Bear Stearns Cos., as well as securities called collateralized debt obligations the central bank purchased in the bailout of AIG, the largest U.S. insurer by assets.

Staff Overwhelmed

Such contracts show how the Fed’s in-house staff has been overwhelmed by new responsibilities that the central bank has taken on in handling the crisis.

“Once the government starts getting into the business of restructuring companies, there are competency deficits,” said Phillip Phan, professor of management at the Johns Hopkins Carey Business School in Baltimore. “It’s inevitable they’ll go back to Wall Street for advice.”

Still, he said, “the man in the street would say, ‘We’re paying to fix somebody else’s mistake by paying the very people who are part of the system that produced the mistake.'”

Alabama Representative Spencer Bachus, the ranking Republican on the House Financial Services Committee, said the issue of hiring so many outsiders is a “major concern.”

Opportunity for Conflict

“It’s necessary with the magnitude of the intervention,” Bachus said in an interview. “They lack the staff internally. But that comes with opportunity for conflicts of interest. It’s a quandary.”

Before the government hired him, Huebner had represented JPMorgan in talks about organizing a private rescue of AIG that were ultimately unsuccessful. Huebner has also advised Morgan Stanley, Credit Suisse and Bank of America Corp. on derivatives and other transactions.

“It’s complicated stuff that lawyers inside the government wouldn’t do ordinarily, and the stakes are high enough you want really good, experienced counsel,” said Stephen Cutler, JPMorgan’s general counsel and former enforcement chief at the Securities and Exchange Commission.

To be sure, the Fed hasn’t outsourced all day-to-day contacts with AIG. The New York Fed has observers at all AIG board and board committee meetings. Fed employees stationed inside AIG “monitor the company’s funding, cash flows, use of proceeds and progress in pursuing its global divestiture plan,” the Fed reported to Congress in November.

No Publicity

The Fed hasn’t publicized its hiring of Davis Polk or other consultants and declined to provide information for this article.

“The Fed doesn’t participate in stories about our consultants,” New York Fed spokesman Calvin Mitchell said in an e-mail, adding the Fed doesn’t want outside advisers to use their dealings with the central bank as a marketing tool.

Before taking on the Fed’s AIG assignment, Huebner shepherded Delta Air Lines Inc. through bankruptcy in 2005 to 2007. Delta’s former general counsel, Kenneth Khoury, credits Huebner with getting the airline through the process in “near- record time.”

“He’s a brilliant lawyer, he’s a good guy and he’s a creative dealmaker,” Khoury said.

Ambulance at the Curb

As an emergency medical technician for Hatzolah, an all- volunteer emergency services and ambulance provider, Huebner spends Sunday nights on-call at his home on Manhattan’s Upper East Side, with an ambulance ready at the curb in front of the building.

“Some Sunday nights, there are no calls,” he said in the interview at his 21st-floor midtown Manhattan office, decorated with African and Asian art and photos of his wife and four daughters. “Other Sunday nights, it’s brutal.” At other times, he monitors radio calls “whenever I reasonably can.”

As a Fed consultant, Huebner often joins midnight conference calls and many days works on AIG matters at the New York Fed’s headquarters near Wall Street.

Huebner balances his Fed and AIG work with the bankruptcy of Frontier Airlines and the Minneapolis Star Tribune newspaper.

“I am expected to parachute into situations that, frequently, others have failed to figure out how to solve,” Huebner said. “You need to decide where to operate and where to cauterize.”

To contact the reporters on this story: Scott Lanman in Washington at [email protected]. Hugh Son in New York at [email protected]

Last Updated: February 6, 2009 15:49 EST
By Scott Lanman and Hugh Son

Source: Bloomberg

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