AIG Bailout, Geithner Blasted Hard on Capitol Hill

Geithner also said that though the government faces substantial losses due to the AIG bailout, the deals over counterparty payments should actually yield "some profit" for American taxpayers, with loans relating to the transactions expected to be paid back with interest.

Lawmakers Also Want to Target Bernanke's Role in AIG Bailout

The panel's ranking Republican is now targeting another under-fire member of President Obama's economic team: Federal Reserve chairman Ben Bernanke.

Issa called on the panel's chairman, Towns, to subpoena Bernanke's Fed in Washington after "troubling details" emerged about a disagreement between the central bank boss and his staff about the AIG bailout.

According to an e-mail cited earlier Tuesday by Sen. Jim Bunning, R-Ky., and confirmed by a whistleblower speaking to Issa's staff, Bernanke's "staff recommended that the Federal Reserve not touch AIG" and "did not agree" with Bernanke's stance on the bailout.

Paulson Defends AIG Bailout, N.Y. Fed

Bernanke will not testify at the hearing today, but other witnesses included Paulson, bailout watchdog Neil Barofsky, who released a scathing report on the Fed's handling of the AIG bailout, New York Fed general counsel Thomas Baxter, former AIG senior vice president Elias Habayeb, and former New York Fed Chairman Stephen Friedman.

During his testimony today, Paulson defended the decision to bail out the insurance giant.

"The decision to rescue AIG was correct and I strongly supported it," he said. "An AIG failure would have been devastating to the financial system and the economy."

Though the former Treasury boss said he did not take part in any decisions connected to paying back AIG's counterparties, he praised the work of the Federal Reserve Bank of New York and Federal Reserve on the AIG bailout.

"They sought to make appropriate decisions on those matters and I am confident that this review will show that they did," he said.

In prepared testimony from Barofsky provided to ABC News, the watchdog said he would investigate the government's actions in the AIG bailout for "misconduct relating to the disclosure or lack thereof" in the counterparty payments.

Barofsky and Baxter disagreed over how realistic it would have been for the government to negotiate "haircuts" for AIG's counterparties. Baxter said that other companies, when negotiating lower payments with creditors, can use the threat of bankruptcy as leverage to convince creditors to take less than they are owed.

But Baxter said that, in AIG's case, the threat of bankruptcy wasn't credible. He said that negotiations with counterparties took place in November, 2008, six weeks after the Federal Reserve had already begun efforts to save AIG from bankruptcy.

The "threat of bankruptcy was not true," Baxter said.

But Barofsky argued that the government had other bargaining chips on its side.

"There's a whole different range of options in that negotiation that could have occurred had they simply brought everyone in the same room and it was made a priority," he said.

Lawmakers: Why Was AIG Allowed to Payback Billions in Credit Default Swaps?

New details about the New York Fed's role in limiting AIG's public disclosures initially emerged earlier this month when Issa released e-mails between the regulator and the insurance giant.

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