Facing a grilling from angry lawmakers, Treasury Secretary Timothy Geithner on Wednesday defended his actions in the 2008 bailout of AIG and on the disclosure of payouts to major banks by the insurance giant.
Geithner, called to answer questions about his role in the bailout when he was president of the New York Federal Reserve, said the actions were aimed at financial stability and that authorities “did not act to help foreign banks.”
“Congress granted the Federal Reserve emergency authority precisely so that the government had some capacity to act to contain a systemic financial crisis,” he said in prepared testimony at the start of a stormy hearing.
“Not to have used that authority at that time would have been deeply irresponsible.”
Geithner also maintained that he was not involved in a decision to withhold information about AIG’s payouts that some have called a “backdoor bailout” of those firms including Goldman Sachs and a number of foreign banks.
“I had no role in making decisions regarding what to disclose about the specific financial terms of… payments to AIG’s counterparties,” he said.
Overall, Geithner offered an impassioned defense of the role of the central bank and other authorities to rescue AIG in the face of what appeared to be a financial system meltdown in September 2008.
“We did not act because AIG asked for assistance,” told the hearing of the House of Representatives’s Oversight and Government Reform Committee.
“We did not act to protect the financial interests of individual institutions. We did not act to help foreign banks. We acted because the consequences of AIG failing at that time, in those circumstances, would have been catastrophic for our economy and for American families and businesses.”
Lawmakers were not placated by Geithner’s remarks.
“I think our commitment to Goldman Sachs trumped the commitment to the American people,” said Representative Stephen Lynch, a Massachusetts Democrat.
“We’re not getting the whole story, we’re getting a lame story,” said Representative John Mica, a Republican from Florida.
Representative Darrell Issa said after the hearing that Geithner offered nothing to reassure lawmakers.
“It’s not conjecture, it’s not speculation, it’s fact, the New York Fed gave a backdoor bailout to AIG’s counterparties and then tried to cover it up,” Issa said.
Issa said Geithner did little to clarify the question of why AIG payments were not initially disclosed.
“If he didn’t know, he should have and no one has answered the question as to why the New York Fed were so adamant at keeping details of the counterparty deal confidential,” Issa said.
The Fed provided a loan of 85 billion dollars to AIG in September 2008 in what would be the first portion of a staggering bailout worth some 180 billion dollars.
Neil Barofksy, the special inspector general for the Troubled Asset Relief Program passed by Congress, told the panel meanwhile he had “initiated an investigation into whether there was any misconduct related to the disclosure or lack thereof” in the payouts.
The inspector general also said that while some of the US investments in AIG would be repaid with a profit, the government was likely to lose more than 30 billion dollars, based on Treasury estimates.
Barofsky also addressed the issue of assertions from the Fed that it had no ability to impose “haircuts,” or reductions, in the payouts of AIG contracts to big banks, including foreign institutions.
He said the New York Fed “made several policy decisions that severely limited its ability to obtain concessions.”
Only one bank, Swiss-based UBS, was willing to accept a reduction, and that was just a cut of two percent of the value, he said.
Barofsky added that France’s banking regulator “was open to further negotiations” in payments to Societe Generale and other French firms even though it had asserted that any reduction might violate French laws.
But he noted that the French agency had indicated that any reduction “would likely have required universal agreement among counterparties.”
Meanwhile former Treasury secretary Henry Paulson defended the actions to save AIG under his tenure.
“Had AIG failed I believe we would have seen a complete collapse of our financial system, and unemployment easily could have risen to the 25 percent level reached in the Great Depression,” Paulson said.
