WASHINGTON — Treasury Secretary Timothy Geithner told a hostile congressional committee Wednesday that the only way to rescue the insurance giant American International Group in 2008 was to pay U.S. and foreign banks the full face value of $62 billion in bets on risky securities.
Without massive government intervention, AIG would have collapsed, sending the world financial system into ruin, Geithner said.
Democratic and Republican committee members, whose staffers have been sifting through 250,000 subpoenaed documents from the Federal Reserve Bank of New York, which Geithner headed at the time, challenged his contention. They charged that Geithner catered to the same Wall Street firms that caused the financial crisis, costing millions of Americans their jobs.
Rep. John Mica, a Florida Republican, told Geithner that his handling of the AIG bailout warrants his removal.
Two other members of the government trio that spearheaded the massive taxpayer bailouts of the financial industry rallied to defend Geithner, who headed the New York Fed when the decision was made to stop trying to negotiate discounted settlements with AIG.
Henry Paulson, who was Treasury secretary at the time, told the House of Representatives Oversight and Governmental Affairs Committee that he had no role in the negotiations that settled the banks' insurance-like contracts, called credit default swaps, with AIG for 100 cents on the dollar but that the action was critical to avoiding "an absolute disaster."
Fed Chairman Ben Bernanke sent the committee a letter defending the action.
Geithner said that the New York Fed faced "terrible choices" in early November 2008 with only days to try to negotiate a discount on the contracts, many of which insured securities backed by dicey subprime loans. When the banks didn't budge, he said, AIG faced threats of a downgrade by credit-rating agencies that would have sent it careening into bankruptcy with worldwide ramifications.
That assured that Goldman Sachs received a total of $14 billion on its exotic bets with AIG, and Merrill Lynch got $6.2 billion. France's Societe Generale got $16.5 billion and Germany's Deutsche Bank received $8.5 billion.
If Fed officials forced a tougher settlement, he said, "Market participants would have lost confidence in AIG, leading to the company's collapse."
"The steps that were taken were motivated solely by what we believed to be in the public interest," said Geithner, seemingly undaunted and at times combative. "We did not act because AIG asked for help."
"We could not credibly threaten not to pay. That meant putting AIG into bankruptcy. At the time, we were working desperately to rebuild confidence in the financial system. Any suggestion that we might let AIG fail would have worked against that vital aim. We could not risk a protracted negotiation."
Neil Barofsky, the special inspector general tracking the use of taxpayer bailout funds who recently issued an audit challenging the Fed's decisionmaking , told the committee that the Fed could have negotiated "in a more forceful way" to resolve the swap contracts.
Barofsky, who disclosed this week that he's opened investigations into the Fed's candor about the matter, recalled that Paulson, Bernanke and Geithner leaned weeks earlier on failing investment bank Bear Stearns to accept $2 a share to turn over its assets to banking goliath J.P. Morgan Chase.
"They could have just tried a little harder" with AIG, Barofsky said, and that might have saved "billions, even tens of billions of dollars."
The committee's ranking Republican, Darrell Issa of California, pressed Chairman Edolphus Towns of New York to issue a subpoena for the New York Fed's records.
However, after the release of embarrassing Fed e-mails suggesting efforts to conceal the terms of the AIG bailout, Democrats joined in criticizing President Barack Obama's Treasury secretary. Their new populist demeanor came a week after a Republican won the Massachusetts Senate seat of the late Sen. Edward Kennedy in a stunning upset, and some senators came out in opposition to confirming Bernanke for a second term.
Towns opened the hearing by saying that the full payout to major banks amounted to giving them "a piggy bank full of taxpayers' dollars and (saying) help yourself."
Democratic Rep. Stephen Lynch of Massachusetts, his face reddening as his voice rose, rejected Geithner's assertion that he lacked authority to take another course.
"Let me tell you something," he said. "We were changing the rules and regulations every single day. . . . You had every opportunity, every opportunity to weigh in on behalf of the American people and make these people . . . take a haircut," meaning a discount.
Various panel members noted that Paulson is an ex-Goldman chief executive, Geithner's chief of staff previously worked for Goldman, and Dan Jester, a Treasury point man in the AIG bailout, is a Goldman alum.
Most committee Republicans didn't buy Geithner's explanation either.
"We're not getting the whole story, we're getting a lame story," said Mica, who asked Geithner why he didn't just resign.
Getting personal, Mica brought up the issue that nearly scuttled Geithner's nomination to head the Treasury Department, his failure to pay self-employment taxes.
"You gave a lame excuse then; you're giving a lame excuse now," he said.
As to the charge of a cover up, Geithner said that many of the controversial decisions about disclosing the face value payouts came after he was nominated on Nov. 24 to be treasury secretary and removed himself from handling day-to-day policy issues.
In a letter released Wednesday to the committee's top Republican Issa, Bernanke offered a more nuanced answer about whether the health of Wall Street banks played a role in the AIG settlement.
The idea, said Bernanke, was to halt the investor drain on AIG's reserves, not to protect a few banks.
"Whether the individual counterparties were in relatively sound financial condition or not was not a factor in the decision regarding the amount paid to the counterparties or whether concessions should be sought from them," he wrote.
Paulson said he had "limited knowledge on the topic of immediate interest to the committee."
Paulson denied discussing terms of the swap settlements in his many phone calls with Geithner during the turbulent autumn of September 2008.
Without the rescue of AIG, he said: "We easily would have had 25 percent unemployment," and home prices would have plunged further than they already have. "This would have been an economic nightmare."
(Tish Wells contributed to this article.)
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Geithner to defend bank bailout — and maybe his job, too