Lawmakers challenged Treasury Secretary Timothy Geithner’s credibility recently after he said he was not involved in a decision by bailed-out insurer AIG to withhold details about $62bn paid to banks.
Geithner held his ground at a hearing, however, insisting the government-funded rescue which cost more than $180bn had been necessary to avert economic collapse.
Big taxpayer-funded bailouts for AIG and other financial institutions at a time of soaring unemployment have angered voters.
Concerns about the economy helped to put a Republican into a Senate seat that had been long-held by Democrats in Massachusetts, serving notice to lawmakers facing re-election in November.
“Why shouldn’t we ask for your resignation as secretary of the Treasury?” Florida Republican John Mica demanded. “I think you’re punting the blame … I believe we’re not getting the whole story.”
The populist backlash has heaped pressure on Geithner and threatened to scuttle a bid by Ben Bernanke for a second term as chairman of the Federal Reserve.
Both men are architects of the financial rescue.
“It was a circus and what I saw I thought Geithner handled it well and that the adults on Capitol Hill will recognise that,” said Kevin Krueger, an analyst with Concept Capital in Washington.
Democrats and Republicans alike questioned how Geithner, who led the New York Federal Reserve Bank at the time, could have been in the dark over a decision by American International Group Inc not to disclose for months the details about billions of dollars it paid banks to settle swaps contracts.
The payments amounted to letting Wall Street “loot the corpse” after the government had propped up AIG, said Edolphus Towns, the New York Democrat who chairs the US House of Representatives Oversight Committee.
The Republican who brought the controversy to a head, Darrell Issa of California, said he wasn’t satisfied with Geithner’s responses and vowed to keep pursuing his investigation.
“If [Geithner] 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 in a statement after the hearing.
Issa also released a document that showed tranche and identification numbers for individual bonds purchased by a Fed investment vehicle. The Securities and Exchange Commission last year had ordered the information sealed until 2018.
Thomas Baxter, the New York Fed’s general counsel, said the Fed sought to keep the so-called cusip data secret because it would give hedge fund traders an advantage and could hurt the value of the assets for taxpayers.
AIG’s trading partners received 100 cents on the dollar to settle the swaps deals and lawmakers questioned why taxpayers did not get a better deal.
Geithner held steadfast to his defense that he had withdrawn from decisions by the New York Fed, which led the AIG bailout, after he was nominated to the Treasury post in late 2008. He forcefully defended his role in helping rescue the insurer.
“For the first time since the Great Depression, you were seeing a full-scale run on the financial system,” Geithner said, his temper occasionally flaring.
He said he had “no role in making decisions regarding what to disclose about specific financial terms” of the AIG rescue in November 2008, a bailout that eventually grew to cost more than $180bn.
Neil Barofsky, special inspector general for the Treasury’s $700bn financial rescue fund, questioned whether the New York Fed and Treasury could have taken a harder line with bank counterparties, rather than paying them at par.
“They could have just tried a little harder,” he said. “It may have resulted in saving US taxpayers billions, if not tens of billions of dollars. We’ll just never know.”
Geithner shows remorse but defends decisions
Geithner ceded little ground during the two and a half hour grilling but expressed some remorse at AIG-related decisions taken after he had rescued himself.
“In retrospect I wish I’d known” that AIG was keeping details quiet about the names and amounts of payments it was making to banks, he said.
Geithner insisted, however, that the decision to save AIG was “the best of a terrible set of choices” the government had faced.
“People were taking their savings out of the banks, they were wondering if a dollar was a dollar… There was a basic calamitous breakdown in the fabric of our system.”
Henry Paulson, who was Treasury secretary when the initial decision to bail out AIG was taken, denied any knowledge of AIG’s payments to banks, saying the Fed had authority to deal with counterparties. He backed Geithner’s position that an AIG rescue was necessary.
“The decision to rescue AIG was correct and I strongly supported it,” he said.
Several lawmakers protested that not enough effort was made to negotiate discounts with bankers. They said New York Fed officials had concurred with an AIG decision not to reveal the names of banks that got payments, or amounts.
Democratic staff members said they had found no evidence in hundreds of thousands of pages of documents subpoenaed by the committee to suggest Geithner was directly involved in decisions on the bank payments.