Embattled Treasury Secretary Geithner today defended himself against skeptical Republicans and Democrats on the House Oversight and Government Reform Committee over his role in the $182 billion bailout of American International Group and the government's decision to allow counterparty banks to be paid billions through the rescue.
Most significantly, Geithner disputed GOP charges that he was involved in a cover up by the Federal Reserve to fight disclosure of the big banks that received payment as a result of the AIG action.
At the time of the rescue in fall 2008, Geithner served as president of the New York Federal Reserve. But the Federal Reserve did not release the names of the banks that received AIG money until March 2009, under pressure by Congress.
"I had no role in making those decisions," Geithner said of the release of the counterparty list.
He noted he recused himself from AIG decisions on Nov. 24, 2008, after President-elect Obama nominated him for Treasury secretary. Before Nov. 24, he had no discussion with Fed colleagues on whether to release the names of the banks, he added.
House Oversight and Government Reform ranking member Darrell Issa was skeptical, noting an e-mail from Geithner, dated March 15, 2009, to William Dudley, Geithner's replacement at the New York Fed, that read: "Where are you on the AIG counterparty disclosure issue?"
Geithner said he was simply inquiring where the Fed was in the process of making a decision, noting it had been a source of controversy. He added he thought it was appropriate that the Fed release the names of beneficiaries, including Goldman Sachs, which got $13 billion, and Societe Generale, which received $12 billion.
"Should that have come sooner? I think reasonable people could come to that judgment. But I did not stand in their shoes," Geithner said of New York Fed officials that made the decision.
But such statements did not satisfy his GOP critics.
"You have given lame excuses then; you are giving lame excuses now," said Rep. John Mica, R-Fla., who asked why Geithner did not step down from his post.
Even House Oversight and Government Reform Chairman Edolphus Towns said he was disheartened by the New York Fed's action. E-mails showed that the bank's officials directed AIG to withhold from the SEC the names of its counterparties.
"The lack of transparency we have seen in the double bailout of AIG leads to distrust which leads to anger," Towns said.
Neal Barofsky, special inspector general for the $700 billion Troubled Asset Relief Program, is investigating the New York Fed's actions in the AIG case.
Meanwhile, Democrats focused their concern on the Fed's call to hold off on pushing the banks to accept a "haircut" instead of receiving the 100 percent they were owed through insurance like contracts that AIG could not pay.
Rep. Stephen Lynch, D-Mass., noted that shareholders of failed investment bank Bear Stearns received only 2 cents on the dollar, but regulators did not leverage AIG counterparties to accept any reduced amount.
"I just think it was a terrible decision on your part," Lynch said. "It just stinks to the high heaven what happened here. ... It makes me doubt your commitment to the American people."
Geithner disagreed, noting the Fed's primary concern was to ensure that AIG would not default because it could send shock waves through the financial system and send markets reeling. Given such a dire negotiating stance, regulators had no leverage.
"If it would be possible, we would have done it," Geithner said.
Barofsky told the panel that his investigation found that New York Fed employees tried to persuade the counterparty banks to accept "haircuts." But seven institutions rejected the offer, and only the Swiss bank UBS was willing to take a 2 percent concession if the others did. Geithner then "acquiesced" to the recommendations of senior officials at the New York Fed to fulfill the contracts, Barofsky said, even though the market value was 48 cents on the dollar.
His investigation also found that the French banking regulator was open to further negotiations with the Fed to discuss the possibility of concessions because of its fear the transactions could violate French law.
This article appears in the January 30, 2010, edition of National Journal Daily PM Update.