An avalanche of information is threatening the futures of an ever-growing circle of men involved in what appears to be a cover-up of circumstances surrounding the “bailout” of counterparties to AIG. At the centre of the circle stand Federal Reserve chief Ben Bernanke and Treasury Secretary Tim Geithner with more questions to be asked in coming days by powerful committees. All this while the confirmation of Bernanke hangs in delicate balance.

The term Watergate has already cropped up numerous time – the crime being the cover-up rather than the crime, although in the case of AIG all we have is a dreadfully botched cover-up and therefore the assumption of a crime. Those throwing around the Watergate word are not doing so frivolously.

Keeping up with the revelations of a cover-up is a major task as more detail seems to break hourly, partly because so much information barred from the public has been found – on public record – by journalists at last alive to the consequences of the what threatens to consume insiders. High officials had worked assiduously to prevent lawmakers and journalists from finding out where some $180 billion in AIG money was heading, but the maze is unravelling. So ludicrous is the situation that one FOI request lead to officials realising that other requests might be forthcoming, so they stamped the information “secret” before the request came. It never did. But that’s national security: the feeling that you, if not the nation, are secure.

Matthew Goldstein at Reuters reports that US securities regulators originally treated the New York Federal Reserve’s (FRBNY) bid to keep secret many of the details of the AIG bailout under the guise of national security.

The request to keep the details secret was made by the FRBNY – the very regulator that is supposed to prevent this activity and the same regulator that helped orchestrate the bailout. The other request came from the giant insurer itself, according to Reuters.

The emails were written early last year and reveal officials at the FRBNY were comfortable with AIG submitting a critical bailout-related document to the US Securities and Exchange Commission only after getting assurances from the regulatory agency that “special security procedures” would be used to handle the document.

The SEC, according to an email sent by a FRBNY lawyer on January 13, 2009, agreed to limit the number of SEC employees who would review the document to just two and keep the document locked in a safe while the SEC considered AIG’s confidentiality request.

The SEC emails to the FRBNY (i.e. Tim Geithner) show it keeps secret financial records related to “national security” that only two people within the SEC are allowed access to.

“The SEC had also agreed that if it determined the document should not be made public, it would be stored ‘in a special area where national security related files are kept,’ the lawyer wrote.”

But now regulators with guns and power to break locks have been brought in. Things are getting mighty interesting.

The Financial Times is examining an investigation by Neil Barofsky, the special inspector general overseeing the troubled assets relief program (TARP), over the adequacy of the Special Investigator (SIGTARP) disclosure of documents relating to the bailout of AIG and its counterparties.

SIGTARP has the longest arm of any of the investigators. As the New York Times points out:

“There are, in fact, several other panels charged with reviewing and monitoring the bailout. But Mr Barofsky is the only one backed by federal agents who carry guns and badges and, if necessary, can break the locks off file cabinets.”

Tomorrow, Mr Barofsky, will appear at Congressional hearings alongside Mr Geithner. He says in his testimony that he is pursuing parallel investigations into whether the FRBNY improperly withheld information from the SEC and whether it subsequently withheld documents from his office during an earlier audit of the payments.

Yves Smith at Naked Capitalist comments that “this is starting to get VERY interesting. L’affaire Fed/AIG is beginning to smell a little like Watergate, where an imperial organization that thinks it writes its own rules (then the Nixon administration, here the Fed) fights tooth and nail to keep certain activities hidden well away (recall, for instance, the Saturday night massacre).”

Smith with years of background in these murky parts of Washington and a reputation for being able to pick the eyes out of a lie, asks why is the Fed so desperate to hide the details of the AIG bailout.

And what about the role of Bernanke (much has concentrated on Geithner to date)? “ He and Paulson were virtually joined at the hip during the crisis, and Paulson was heavily involved in all the bailouts. Was the NY Fed a rogue organization of some sort? How can you not say the board of governors is not ultimately responsible for a matter as significant as the AIG rescue?” Smith writes.

Meanwhile Darrell Issa of the House Committee on Oversight and Government Reform, who has been pushing this ever growing snowball around Washington for weeks, has issued a report ”Public Disclosure As A Last Resort: How the Federal Reserve Fought to Cover Up the Details of the AIG Counterparties Bailout From the American People”. The report is based on the famed 250,000 pages of documents from the FRBNY obtained via subpoena. One of the many striking bits is that it is still stonewalling on some of its subpoenas.

The FRBNY’s documents do not include any documents responsive to the Committee’s subpoena prior to September 2008, so the Committee is not currently able to learn when the FRBNY first became aware of potential problems at AIG. In addition, the FRBNY’s document production does not include any documents responsive to the Committee’s subpoena after May 2009, so the Committee is also not currently able to learn the full extent of the FRBNY’s efforts to conceal information about the counterparty payments from this Committee and the public over the last eight months.

Revelations in the Issa report include how much the Fed took charge at AIG as far as protecting its (institutional) interests were concerned. But here we see the Fed as extraordinarily intrusive on its own prerogatives. For instance:

On October 31, 2008, after AIG had failed to convince its counterparties to wind down the CDO contracts, the FRBNY ordered AIG to “stand down on all discussions with counterparties”.

The Fed pressured AIG to claim that it would suffer “substantial competitive harm” if details of the CDOs involved in the bailout were revealed. “That’s an obvious lie,” writes Smith.

So we have the Fed pushing a public company to make misrepresentations to the SEC. It is a thrill a minute to see how America is governed.

On November 17, 2008, AIG was about to make a required filing to disclose a new compensation package for its CFO, David Herzog. AIG shared its draft filing with law firm Davis Polk & Wardwell. The filing disclosed Herzog was about to rake in millions of dollars in bonuses.

Less than 40 minutes after receiving the draft filing from AIG, Davis Polk senior partner Marshall Huebner sent a frantic email titled “READ ME” to the FRBNY’s general counsel Thomas Baxter: “Sometimes I really do feel like evil gremlins are running this deal somehow. Very bad timing to have this [filing] come out just before the Secretary [Henry Paulson] and the Chairman [Ben Bernanke] go before Waxman…”

Huebner asked Baxter, “Is there any chance – and maybe it is just too late – to get the Herzog comp package unagreed to? … [W]e could help get the package changed/fixed before it is disclosed.” This issue, Huebner said, needed to go “right to [AIG CEO] Ed [Liddy] right now.”

Waxman, of course is Henry Waxman the California congressman no one wants to go before as his grillings are chilling.

It looks like the FRBNY’s coercion succeeded in getting Herzog’s compensation package “unagreed to” because AIG never made the filing.

There is more much more. Many a book will be forthcoming.

But what does this mean to Bernanke’s confirmation due only days away? When the week began the assumption was that he’d get by — as long as no other grim tidings were to surface. Grim enough for you?