Crucial Week for Obama's Economic Team

WASHINGTON, Jan. 26,2010—, 2010 -- President Obama's economic team has weathered many storms during the last year as the nation's recession dragged on, but this week two of the administration's leading figures will have to navigate some especially rough headwinds on Capitol Hill.

Not only is Federal Reserve chairman Ben Bernanke's reconfirmation up in the air in the Senate, but Treasury Secretary Tim Geithner will face a grilling on the Hill Wednesday over the controversial bailout of the insurance giant AIG.

The House Oversight & Government Reform Committee is examining the role of the New York Fed – under Geithner's leadership – limiting AIG's public disclosures about paying off companies they had transactions with during the tumultuous fall of 2008.

E-mails obtained by ABC News showed that the New York Fed wanted the Securities & Exchange Commission to store a document related to the AIG bailout "in a special area where national security related files are kept" if the SEC agreed that the document should not be made public. Another e-mail showed the New York Fed's lawyers directing AIG to run "future SEC filings, press releases, and other significant communications" by the Fed's lawyers first.

The e-mails come from 250,000 documents handed over to the House committee after the panel's chairman, Ed Towns, D-N.Y., subpoenaed the New York Fed.

Now the panel's ranking Republican, Darrell Issa of California, is calling for the White House to shake up his economic team.

"If the president is angling to successfully hit the restart button on the economic debate, he is going to have to reshuffle the deck of economic advisors or face questions about his sincerity and credibility," Issa told ABC News. "Both Democrats and Republicans in the House and Senate are openly challenging the wisdom of his advisors, and with unemployment stalled at ten percent and the majority of Americans disapproving of the President's handling of the economy, there couldn't be a better time to make changes."

Wednesday's AIG hearing comes on the heels of a rough week for the White House.

Last week Main Street's outrage at Washington and Wall Street was on full display as Republican Scott Brown scored an upset victory in the Massachusetts Senate race to snatch away the Democrats' super-majority in the Senate and jeopardize the administration's push for health care reform.

Brown's shocking win also left Bernanke's seemingly-certain reconfirmation in jeopardy, as last Friday two prominent Democrats -- Sens. Russ Feingold and Barbara Boxer -- added their names to the list of liberals opposing a second term for Bernanke as Fed chairman.

"I don't think people think Bernanke's done, but before they thought it was a foregone conclusion -- and now they don't," a Congressional source told ABC News. "What's changed? Massachusetts. Now folks aren't sure what to do and they don't really trust the administration and everybody feels very vulnerable."

Simply put, the source said, "People are skittish."

One critic, Prof. Peter Morici of the University of Maryland, told ABC News that Main Street's outrage about the recession could lead to the White House reworking their economic team.

"My feeling is that if things don't get better, they're going to have to feed someone to the wolves," said Morici.

But the White House says no such changes are coming.

In an interview with Terry Moran on ABC's "This Week," White House adviser David Axelrod said that the administration does not intend to make any political sacrifices after the Massachusetts setback.

"Washington loves the shake-up story, Washington loves the 'When are we going to throw a body out?' story. That's not how we roll," he said, downplaying the return of Obama's 2008 campaign manager David Plouffe.

While Axelrod acknowledged voter unrest about the economic turmoil, he emphasized that the President inherited a dire situation when he entered the Oval Office in January of 2009.

"Let's understand that we are governing in the worst economy since the Great Depression," Axelrod said. "When the president walked in the door, he was handed the worst economic downturn since the Great Depression, a financial crisis that held out the prospect of the collapse of the financial system and a fiscal crisis."

"Our responsibility was to make sure that the economy didn't tip into a second Great Depression, which was a real possibility," he said, so the administration pressed forward with the Bush administration's $700 billion financial bailout and initiated a $787 billion stimulus package of its own.

"But those," Axelrod continued, "were not popular things to do. I have no regrets about that. I think history will look back and say the president of the United States met his responsibility."

In the past year the economy has shown some signs of improvement. During the third quarter of 2009 the economy grew for the first time in years, with the gross domestic product up by 2.2 percent. And in November, for the first time since the recession began in December 2007, the nation's employers added jobs to their payrolls.

Geithner, for one, can count high-profile supporters such as Warren Buffett firmly in his corner. Just last week, Buffett voiced his backing of the Treasury boss.

"I think he's terrific," Buffett told CNBC. "I describe that period as the economic Pearl Harbor…The important thing after Pearl Harbor was that the country saw their government was going to act and act properly and decisively and that we would win the war. And that's what happened."

But Geithner has recently been at odds with other members of the President's economic team. The Treasury boss had reservations about the President's announcement last week of the "Volcker Rule," a new proposal to limit the size and scope of the country's banks. The proposal -- championed by its namesake, former Fed chairman Paul Volcker -- could hurt the competitiveness of U.S. banks in the global marketplace, Geithner feared. Moreover, sources tell ABC News, Geithner felt the proposal could be the result of political considerations, rather than economic ones.

On AIG, Geithner has denied any involvement in the disclosure decisions.

"I wasn't involved in that decision," he said flatly a recent interview with CNBC.

But thus far neither Geithner's denials about his role in the AIG bailout nor his role in bolstering the economy have been enough to placate Republicans such as Issa.

"At the heart of the issue is that this administration likes to claim credit for bringing the country back from the brink of catastrophe, yet, when anyone challenges decisions that were made like with AIG, we are told that the top guys had nothing to do with it," Issa told ABC News. "You can't have it both ways."

On Wednesday Issa will hear first-hand from Geithner, as well as New York Fed general counsel Tom Baxter; former AIG senior vice president Elias Habayeb; and the Special Inspector General for the TARP, Neil Barofsky.

It was Barofsky who earlier this month was ordered by the Fed not to provide the House panel with documents related to the bailout. That development prompted Rep. Towns' subpoena.

Former Treasury Secretary Hank Paulson has also been called to testify at the hearing, but it is unclear if he will attend.

The controversy over the New York Fed pressuring AIG to limit the company's public disclosures about their counterparty payments has gathered steam in recent weeks, after Issa released e-mails between the Fed and the insurance giant.

In all, 16 of AIG's counterparties -- financial institutions in the U.S. and abroad that had deals with the insurance giant -- received $62.1 billion in taxpayer money after they were paid full value for their swaps, with Societe Generale raking in $16.5 billion in payments and Goldman Sachs $14 billion.

In one e-mail, the 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. That information was then excluded from AIG's eventual filing in December 2008.

Bernanke last week requested that the government's leading auditor -- the Government Accountability Office -- conduct an audit of the insurance giant's bailout, which eventually swelled to a record $182 billion.

In the past Bernanke has said the AIG bailout bothered him, but it was a necessary thing to do.

On Sunday the White House expressed confidence that the Bernanke will be confirmed by the Senate by the end of this week to serve a second term at the helm of the central bank.

"We believe he will be confirmed," spokesman Robert Gibbs told "FOX News Sunday."

If he is -- and if Geithner emerges unscathed from Wednesday's AIG hearing -- it would be a victory at a much-needed time for the President's economic team.