06/06/2009 05:12 am ET Updated May 25, 2011

Confirmed: Barofsky Investigating Chrysler Bond Holders

Neal Barofsky is wasting no time investigating Wall Street banks and hedge funds who may have purposely driven Chrysler into bankruptcy in order to cash in on taxpayer-funded, AIG-issued credit default swaps.

Many of the Wall Street firms holding Chrysler bonds also own credit default swaps that they bought to hedge various bets. These swaps, which are essentially like an insurance policy on the bonds, were largely issued by AIG. If Chrysler went under and the firms held AIG swaps, they'd get paid out at a far high rate than the government was offering - although the government was actually funding both offers.

Rep. Elijah E. Cummings (D-Md.) informed Barofsky, inspector general of the Troubled Asset Relief Program (TARP), of the CDS scenario last week. On Tuesday, he sent a letter to Barofsky officially requesting he open an investigation.

Already started, Barofsky's office told him in a reply sent Wednesday.

"After your meeting with the Special Inspector General last week, Mr. Barofsky directed...the audit team to begin exploring the interplay between potential bankruptcies in the auto industry and the issuance of credit default swaps tied to such bankruptcies, and to what extent an examination of such interplay could be incorporated into ongoing audit work involving AIG counterparty payments," writes Kevin Puvalowski, deputy inspector general.

Puvalowski said the inspectors would have a better idea of the time line for the investigation in the coming weeks.