Geithner Gets Grilled

What did Timothy Geithner know, and when did he know it?

That’s the Watergate-era question the Treasury secretary faced today as he endured two-and-a-half hours of questioning at a House committee hearing on the federal government’s rescue of American International Group in late 2008.

Geithner said he was aware of, and supported, the controversial decision to pay AIG’s trading partners full value for the credit-default swaps they had purchased from the insurance giant. At the time, he was president of the Federal Reserve Bank of New York. Geithner, however, said he was not involved in any decisions to withhold information about these deals from the public. That’s because he had recused himself from policy decisions and day-to-day management at the New York Fed after November 24, when President-elect Barack Obama selected him to be Treasury secretary.

Fed officials have been accused of trying to cover up the fact that the government paid AIG’s counterparties 100 cents on the dollar. Thomas Baxter, executive vice president of the New York Fed, testified today that those “allegations are not true.” As evidence, he pointed to analyst reports and news stories in late 2008 that reported AIG’s counterparties were going to be fully compensated.

Members of the House Oversight and Government Affairs Committee, however, were more interested in what Geithner had to say, particularly his contention that he had no discussions with anyone at the Fed about whether to disclose the terms of its deals with AIG’s counterparts.

Representative John Mica called Geithner’s account “a lame story,” and told the Treasury secretary that “you were either incompetent on the job or you were not doing your job.”

The whole episode sounded like “a cover-up” to California Representative Brian Bilbray.

Indiana Republican Dan Burton said it “stretches credulity” that Geithner would not have been aware of disclosure discussions about the AIG counterparty deals when his employees were “sending emails all over the place” about it.

“It just doesn’t make any sense to me,” Burton said.

New York Democrat Edolphus Towns, who chairs the committee, said “the circumstances surrounding the payments to the counterparties has created an air of suspicion and distrust among the American people.”

In most cases, when a business is collapsing, its creditors have to take less money than they are owed or else risk not getting any money.

“In the case of AIG, nobody got a haircut,” Towns said. “Instead, they were given a piggy bank full of taxpayer dollars.”

Geithner said the government rescued AIG because failing to do so “would have brought about utter collapse” in the economy.

“Thousands of more factories would have closed their doors,” he said. “Millions of more Americans would have lost their jobs.”

Fed officials tried to persuade AIG’s counterparties to accept a haircut on their securities, but “we knew that the likelihood of success was modest.”

“Relatively quickly, and not unexpectedly, we discovered that most firms would not, on any condition, provide such a concession,” he said.

If the Fed had forced these financial firms to take haircuts, credit agencies would have downgraded AIG’s rating even further, and the company would have collapsed, Geithner said.

But Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, said the Fed put itself into this position because it failed to use its leverage as regulators over these institutions. The Fed may have good intentions—saving the financial system from collapse—but the effect of its action “was that tens of billions of dollars of government money was funneled inexorably and directly to AIG’s counterparties,” Barofsky said.