AIG Bailout, Geithner Blasted Hard on Capitol Hill

WASHINGTON
Jan. 27, 2010— -- How did the U.S. government pay $62 billion in taxpayer dollars to AIG's trading partners and then pressure the insurance giant not to disclose the details of the deal to the American public?

No one in charge seems to have any idea.

Treasury Secretary Tim Geithner, who led the New York Fed at the time, told the House Oversight and Government Reform Committee earlier today that he wasn't involved. Federal Reserve chairman Ben Bernanke said in a letter to the panel's ranking Republican Darrell Issa that he was "not directly involved in negotiations." And Hank Paulson, who ran the Treasury Department at the time, also said he had nothing to do with the issue.

"I was not involved with the negotiations," Paulson told the committee, which held a hearing today to investigate the government's controversial $182 billion bailout of AIG. "I was not involved with anything surrounding those payments."

All the denials made some lawmakers scratch their heads in disbelief.

"We have this bailout of AIG and you don't know anything about it," Rep. Dan Burton, R-Ind., told Paulson. "Mr. Geithner had nothing to do with it. It just really boggles the mind that some of the biggest people involved in this whole thing from beginning to end had nothing to do with it. They didn't know. It makes you want to think that some clerk someplace was making these decisions. I don't think anybody's going to buy that."

But lawmakers from both sides of the aisle seemed to reserve their stiffest criticism for Geithner, who was the first to testify at the hearing today.The rescue of AIG began in 2008, when Geithner led the Federal Reserve Bank of New York, which orchestrated the bailout.

Rep. John Mica, R-Fla., argued that Geithner committed errors so serious that he should be booted from office.

"You were either incompetent on the job or you were not doing your job and knew what was taking place and tried to conceal it and I think that's grounds for your removal," he said.

Among other issues, the committee is investigating allegations that the New York Federal Reserve -- under Geithner's leadership -- pressured AIG in late 2008 not to disclose information about paying its counterparties full value for financial instruments known as credit-default swaps. A number of banks both in the U.S. and abroad -- including Goldman Sachs and Societe Generale -- ultimately received a total of over $60 billion for their swaps.

The banks trading with AIG, committee chairman Edolphus Towns, D-N.Y., said today, should have taken "a haircut," or discount, on what AIG owed them, just as creditors do when the companies they lend money to fall into trouble.

In the case of AIG, he said, "nobody got a haircut. Instead they were given a piggy bank full of taxpayer's dollars and [told] help yourself."

"Taxpayers were propping up the hollow shell of AIG by stuffing it with money and the rest of Wall Street came by and looted the corpse," he said.

E-mails obtained by ABC News -- from some 250,000 documents that the Fed gave the panel following a subpoena -- have shown that the Fed wanted the SEC to store a document related to the AIG bailout "in a special area where national security files are kept" if the SEC agreed that the document should not be made public. Another e-mail showed the Fed's lawyers directing AIG to run "future SEC filings, press releases, and other significant communications" by them first.

But committee staff on the Democratic side said Tuesday night that there was "no evidence suggesting Geithner knew about it much less was involved" in the disclosure decisions.

That backs up Geithner's previous statements denying any involvement in the issue and what he said today.

Geithner testified today that after being asked by Obama on Nov. 24 to take over at Treasury in January, he withdrew from involvement "in monetary policy decisions, policy involving individual institutions, and day-to-day management" of the New York Fed. He had no role in disclosure decisions on counterparty payments, he said.

But Geithner's defense seemed only to provoke lawmakers, prompting several heated exchanges.

Geithner 'Takes Pride' in AIG Decisions

Mica said that the treasury secretary was distancing himself from a "cover-up," an assertion Geithner denied. Mica also criticized Geithner as offering "lame excuses."

"Either you were in charge and you did the wrong thing or you participated in the wrong thing," he said, later adding, "I think you're punting the blame and I think you're trying to position yourself as the savior."

"You don't know me very well," Geithner shot back.

Confronted with Mica's call for his removal, Geithner said he was proud of his work.

"I was there. I know what I was responsible for," he said. "I take full responsibility for and I take great pride in those judgments."

Other Republicans were no friendlier to Geithner.

Ranking committee Republican Rep. Darrell Issa and Rep. Dan Burton, R-Ind., joined Mica in expressing doubt that Geithner had no role in AIG disclosure decisions, while Rep. Michael Turner, R-Ohio, fired back at a statement by Geithner that he had never been a politician.

"You are absolutely a politician!" Turner declared.

Democrats also lambasted the Treasury Secretary.

"You had every opportunity – every opportunity! – to weigh in on behalf of the American people and make them take a new deal," Lynch said of the government's decision to pay the counterparties full value for credit-default swaps. "That is just unacceptable. You had the opportunity. I just think it was a terrible decision on your part."

"It just stinks to high heaven what happened here!" Lynch said. "The disclosure was not there. That was inexcusable and it makes me doubt your commitment to the American people."

Taxpayer Payback?

What sort of payback taxpayers will see as a result of the AIG bailout remains a bone of contention between lawmakers and the Treasury.

Issa called the rescue "a backdoor bailout" that likely won't return all the taxpayers' money.

"It's clear that the money paid and it being kept secret may ultimately cause the American people never to be repaid these dollars," he said.

But Geithner today defended the counterparty payments and the government's failure to secure haircuts from AIG's trading partners. With AIG's prospect of failure "imminent," the government couldn't engage "in protracted negotiations" he said.

"If we had tried to force counterparties to accept less than they were legally entitled to, market participants would have lost confidence in AIG, leading to the company's collapse," he said. "The counterparties could have refused, they could have kept the billions in collateral they had already taken, they could have kept the billions in securities they already had, and they could have sued AIG for breach of contract."

The government, he said, "did not have the luxury of time."

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.

In one e-mail, the New York Fed crossed out a reference that AIG was planning to make in a regulatory filing to paying counterparties such as Goldman Sachs and Societe Generale the full value of their credit-default swaps.

"The 250,000 documents we received from the New York Fed paint a startling picture," Issa, who in the past has called for Geithner to resign, said in a statement released prior to today's hearing. "It is clear that the financial elites at the Federal Reserve felt it was more important to take care of wealthy Wall Street firms than to protect the taxpayer investments."

"Fed officials mocked the idea of transparency while doing everything they could to ensure the public never knew about the billions they funneled to private firms," he said.

That information was then excluded from AIG's eventual regulatory filing in December 2008, Issa says. In all, 16 of AIG's counterparties -- financial institutions in the United States and abroad that had deals with the insurance company -- received $62 billion after they were paid for their swaps, with Societe Generale raking in $16.5 billion and Goldman Sachs $14 billion.

In a Nov. 17 report from Barofsky, the watchdog stated, "There is no question that the effect of FRBNY's decisions -- indeed the very design of the federal assistance to AIG -- was that tens of billions of dollars was funneled inexorably and directly to AIG's counterparties."

When Issa asked Barofsky to give lawmakers the documents used in his report, the watchdog said the Federal Reserve had directed him not to comply with the request. Towns then subpoenaed the Fed for the information.

With reports from ABC News' Alice Gomstyn.