Geithner Defends AIG Rescue Decisions

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter, Jan. 27, 2010.

Treasury Secretary Tim Geithner defended the government’s decision to rescue American International Group, Inc. (AIG), and stressed that he played no role in the Federal Reserve Bank of New York’s decision regarding disclosure of payments to AIG counterparties.

Geithner told the House Oversight and Government Reform Committee January 27 that the government’s only motive in coming to AIG’s rescue was to protect the taxpayer, rather than individual institutions or foreign banks. The government’s strategy was “the best of the available options,” Geithner said, as the country was facing “the greatest crisis since the Great Depression.”

On the subject of whether the New York FRBank failed to seek concessions from AIG’s counterparties, Geithner stated that if counterparties had been forced to accept less than they were legally entitled to, market participants would have lost confidence in AIG, leading to further downgrades. Such an outcome, Geithner said, “could have led to the company’s collapse, threatened our efforts to rebuild confidence in the financial system, and meant a deeper recession, more financial turmoil, and a much higher cost for American taxpayers.”

Committee Chairman Edolphus Towns, D-N.Y., said the New York FRBank’s action with regard to AIG impacted “the credibility of the Federal Reserve and it called into question the Fed’s penchant for secrecy.” Because of this secrecy, Towns said, “we still don’t know how or why the decision to rescue AIG was made, or who made the decision to offer AIG’s trading partners 100 cents on the dollar.”

Tempers flared during the hearing, with Geithner coming under attack from both sides of the aisle. Rep. John Mica, R-Fla., said Geithner had offered “lame excuses” for an attempt to “cover up the biggest back-door bailout,” and called for the secretary’s resignation. Meanwhile, Rep. Marcy Kaptur, D-Ohio, sought to imply that the government’s decisions regarding AIG were done merely to protect the interests of Goldman Sachs.