NY Times, January 28, 2010
Geithner Says A.I.G. Rescue Prevented a Depression
By MARY WILLIAMS WALSH and SEWELL CHAN
WASHINGTON — In questioning that at times took on the air of a
cross-examination, the Treasury Secretary Timothy F. Geithner on
Wednesday defended the government actions in bailing out the
American International Group, saying Washington did what was
necessary to prevent “a second Great Depression.”
But Mr. Geithner said he was not involved in withholding
information about deals that sent billions of taxpayer dollars
from the bailout of A.I.G. , the insurance giant, to big banks.
“I withdrew from monetary policy decisions,” Mr. Geithner said,
“and day-to-day management of the New York Fed.”
The committee called Mr. Geithner, former Treasury Secretary Henry
M. Paulson Jr. and other officials to explain, once again, the
confounding results of an $85 billion rescue loan made to A.I.G.
in September 2008. The loan sheltered big banks from any losses,
but saddled A.I.G. with a debt so crushing that the Treasury soon
had to step in and provide even more rescue money. Mr. Geithner
was the president of the Federal Reserve Bank of New York in
September 2008, when the first rescue loan to A.I.G. was extended.
After Mr. Geithner’s statement, the questions focused almost
immediately on trying to determine why those negotiating on behalf
of the taxpayers did not push the banks to make concessions, like
returning the collateral to A.I.G. or accepting less than full
value for their contracts with the insurer.
At times, the hearing took on a scolding, even berating, tone,
that at one point turned personal.
Representative John L. Mica, Republican of Florida, raised the
issue of Mr. Geithner’s personal integrity and honesty, citing the
flap over Mr. Geithner’s failure personal income taxes, which
nearly derailed Mr. Geithner’s confirmation last year.
“I believe either you made a bad decision there, or there was the
attempt to cover up one of the biggest bailouts, backdoor
bailouts, in history,” Mr. Mica said. “Now, you’ve tried to frame
it as you did it in the interest of the people and the failure of
the system, I’m telling you, these are lame excuses. You were in
the charge and did the wrong thing, or participated in the wrong
thing.”
He added: “You give lame excuses, then and you’re giving lame
excuses now.”
“Why shouldn’t we ask for your resignation as secretary of the
Treasury?” Mr. Mica asked.
Mr. Geithner, who kept his composure, responded: “That is your
right, to that opinion. I have worked in public service all my
life. I have never been a politician.”
Representative Dan Burton, Republican of Indiana, assailed Mr.
Geithner’s assertion that he fully withdrew himself from decisions
about disclosure after Nov. 24, 2008.
“It stretches credulity for us to believe that you had no role in
this,” Mr. Burton said, adding, “You were the head of the Fed and
didn’t know anything about it? It just doesn’t makes any sense to me.
Mr. Geithner replied: “Congressman, I was president of the New
York Fed at that time. We were involved, as you know, in
enormously complicated, major things.”
Mr. Burton interjected: “But this is major stuff.”
The exchange was one that would be repeated during the hearing.
Moments before, the top Republican on the committee,
Representative Darrell Issa of California, asked if Mr. Geithner
had “ever become involved with the Federal Reserve’s disclosure
decisions with respect to counterparty claims” after he was
nominated Treasury secretary.
“No, I did not,” Mr. Geithner said.
Mr. Issa promptly pulled up a slide showing a March 2009 e-mail
message in which Mr. Geithner asked William C. Dudley, his
successor at the New York Fed: “Where are you on the A.I.G.
counterparty issue?”
Mr. Geithner began by saying: “Congressman, as you know, the
question of disclosure was the subject of a huge amount of
controversy...”
Mr. Issa cut him off, saying sarcastically: “You think?”
Mr. Geithner replied: “Yeah. That’s what my son says, and I agree
with you.”
In his testimony, Mr. Geithner called the government’s decision to
rescue A.I.G “exceptionally difficult” but one that was “in the
best interests of the American people.”
Mr. Geithner, who had greeted Edolphus Towns, the chairman of the
House Oversight and Government Reform committee, and the top
Republican on the committee, Darrell Issa of California, looked
tense while he listened to Mr. Towns and Mr. Issa make their
opening remarks. His face drawn, he bit his lips on several occasions.
The critical nature of the hearing had a bipartisan tone. Mr. Issa
has led Congress’s investigation into the A.I.G. bailout, and he
secured permission from Mr. Towns to have four other House
Republicans, who are not members of the committee, join them on
the dais: Kevin P. Brady and Ron Paul of Texas, Spencer T. Bachus
of Alabama, Cliff B. Stearns of Florida.
Mr. Geithner tried on Wednesday to persuade lawmakers that the
government acted in the public’s best interest when it bailed out
A.I.G., even though the transaction sent tens of billions of
dollars to a group of big American and foreign banks.
He called for better controls on risk-taking by large financial
institutions, and pointed out that more than a year after the
near-collapse of A.I.G., the government still had no systems in
place to cope with such failures.
Departing from his prepared testimony, Mr. Geithner closed his
comments by forcefully advocating the Obama administration’s
proposed reforms of financial regulation.
“Let me close by saying this,” he said. “If are outraged by A.I.G.
— and you should be — if you are outraged by what happened with
A.I.G., then you should be deeply committed to financial reform.
The United States of America should never have let institutions
like A.I.G. take on a level of risk that threatened the stability
of the financial system.”
“In his prepared testimony, Mr. Paulson, too, said the rescue of
A.I.G. was necessary to keep the economy from collapsing.
“We would have seen a complete collapse of our financial system,”
Mr. Paulson said, “and unemployment easily could have risen to the
25 percent level reached in the Great Depression.”
Mr. Geithner painted a picture of a decision made with the
involvement several agencies including the Federal Reserve and the
Treasury.
“The Federal Reserve and the Treasury determined that it was in
the best interests of the United States to rescue A.I.G. in order
to slow the panic and prevent further damage to our economy,” he
said. Mr. Paulson, however, noted in his remarks that he was not
involved with “any of the decisions made with respect to those
payments.”
“Those matters were handled by the Federal Reserve Bank of New
York and the Federal Reserve Board,” he said. “They sought to make
appropriate decisions on those matters.”
The House panel also sought to learn whether the New York Fed
acted properly later that fall, when it advised A.I.G. to delete
certain information from its public disclosures about the bailout.
By that time, Mr. Geithner had been nominated to head the Treasury
by Barack Obama, then President-elect.
E-mail messages made public in recent days show that A.I.G. sought
the New York Fed’s advice on the contents of its filings about the
bailout to the Securities and Exchange Commission. The New York
Fed crossed out certain passages, including references to the fact
that A.I.G.’s trading partners would get 100 cents on the dollar
on their soured derivatives trades.
Thomas C. Baxter Jr., the New York Fed’s general counsel, in his
prepared testimony offered the panel explanations for several of
the deletions. He said that the New York Fed removed verbal
descriptions of the payments to the banks because the filings
offered much the same information in numbers, which he said were
more precise.
Mr. Baxter explained that the New York Fed felt compelled to pay
out A.I.G.’s counterparties in full to unwind tens of billions of
dollars in derivative contracts because “there was little time,
and substantial execution risk and attendant harm of not getting
the deal done by the deadline of Nov. 10.”
That was the date when A.I.G. was scheduled to report its earnings
and could face downgrades from credit ratings agencies. A
downgrade would have led to more collateral calls and even greater
liquidity problems for A.I.G., Mr. Baxter said.
He added, “Even in a best-case scenario, we did not expect that
the counterparties would offer anything more than a modest
discount to par.” Under the circumstances, he said, “the Federal
Reserve had little or no bargaining power.”
That statement was reinforced by Elias Habayeb, the former chief
financial officer of A.I.G., who said in his prepared remarks that
before the bailout, “the counterparties were unwilling to accept
less than par value.”
Mr. Baxter said it would have been “an abuse of our authority” for
the Fed to have threatened A.I.G.’s counterparties with its
regulatory power to get discounts.
Mr. Baxter also defended A.I.G.’s disclosures about the
transactions in public filings, saying, “What is described here is
the kind of thing that routinely happens in major transactions.”
Louise Story contributed reporting from New York.
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