WASHINGTON — A Treasury Department challenge to the authority of government bailout watchdog Neil M. Barofsky came just as he had begun a sensitive investigation of the department's role in approving bonuses to executives of insurance giant AIG, sources said Thursday.
Department lawyers had sent a message to Barofsky, special inspector general for the Troubled Asset Relief Program, suggesting that lawyer-client privilege could restrict some of his inquiries.
Within a day, Barofsky was assured there would be no impediment to his audits, and all requested documents were provided to his office.
But the proximity of the department's challenge to Barofsky's investigation has raised concerns about the timing of the two events.
And though the matter was resolved for the AIG inquiries, it leaves open the possibility of conflict in the future as audits of the massive program multiply.
Asked why Barofsky's legal authority was challenged by the department just as the AIG inquiry began, Treasury Department spokesman Andrew Williams said: "It is entirely a coincidence."
Treasury Department lawyers say they are still unclear about the legal authority of the special inspector general and have requested clarification from the Justice Department.
Williams said that the decision to send the question to the Justice Department was finalized only after Barofsky, who is responsible for identifying fraud and waste in the government's bailout of the financial system, was consulted and said he had no objection.
The department's skepticism about Barofsky's authority was first disclosed in a letter Sen. Charles E. Grassley (R-Iowa) sent Wednesday to Treasury Secretary Timothy F. Geithner asking for information about a "dispute over certain Treasury documents" that he said were being withheld on a "specious claim of attorney-client privilege."
At the time, it was not known that Barofsky's inquiry focused on the Treasury Department's role in approving AIG bonuses -- a fact confirmed Thursday through sources familiar with the investigation.
The audit of the AIG bonuses may be among the most sensitive. It occurred after public outrage emerged over the payments to individuals who worked in AIG. In mid-March, it was revealed that the top recipient at the firm received a bonus of $6.4 million and 73 received bonuses of more than $1 million.
Geithner had approved the bonuses earlier in March after determining that they were contractual obligations by AIG that could prompt lawsuits if not paid.
His decision came less than two weeks after federal officials agreed to extend AIG an additional $30-billion line of credit on top of the $150 billion in bailout funds the government had already provided. The payments provoked outrage across the country.
Among those most upset at the time was Grassley, who asked the Treasury Department for an inquiry into the approval of bonuses to a firm that was so heavily subsidized by taxpayers.
The current dispute comes as Grassley, ranking Republican on the Senate Finance Committee, is looking into the abrupt firings of two other inspectors general -- one by the White House, the other by the chairwoman of the International Trade Commission.