Top Fed official got waiver on AIG holdings: GAO

WASHINGTON (Reuters) - New York Federal Reserve Bank President William Dudley received a waiver allowing him to keep investments in firms the Fed was rescuing at the height of the financial crisis when he was a top staffer, a congressional watchdog agency found.

"(Three) days after the Federal Reserve Board authorized FRBNY (the Federal Reserve Bank of New York) to assist AIG -- the then-FRBNY president granted ... a waiver to a senior management official with financial interests in AIG and GE (General Electric) who was involved in decision making related to these two companies," a report from the U.S. Government Accountability Office released on Thursday said.

Treasury Secretary Timothy Geithner at that time was the president of the New York Fed.

The agency said the Fed could strengthen policies to prevent conflicts of interest, in particular in instances of emergency lending.

Current restrictions tend to focus on banks and financial firms the Fed normally does business with, but should be expanded to include other financial firms that could at some point get emergency help, the congressional watchdog group said.

The Fed directly rescued insurer AIG, while General Electric received assistance through Fed emergency programs.

GAO said the Fed justified the waiver on the grounds that Dudley was critical to emergency operations, that the value of his investment in AIG was worth less than $15,000, and that divesting might violate laws relating to insider trading.

Further, the New York Fed said divestiture might have created the appearance of a conflict of interest.

The New York Fed declined to comment on the report.