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Geithner defends AIG bailout against critics of both parties

Treasury Secretary Timothy Geithner says the government ‘made the best of a set of terrible choices’ in bailing out insurance giant AIG. But Democrats and Republicans alike hammered him for not demanding more from financial institutions.

By Staff writer / January 27, 2010

Treasury Secretary Timothy Geithner testifies on Capitol Hill in Washington Wednesday before the House Oversight and Government Reform Committee hearing on AIG.

Pablo Martinez Monsivais/AP

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A congressional hearing designed to shed light on troubling aspects of the AIG bailout may have done the opposite – airing the case that public officials had little choice other than their wholesale rescue of the insurance giant.

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Treasury Secretary Tim Geithner told the House Oversight and Government Reform Committee Wednesday that the government “made the best of a set of terrible choices” in the fall of 2008, bailing out AIG when the alternative was to watch the whole economy tank.

Others spoke at the hearing, but the most compelling case against Mr. Geithner’s assertion was a tentative one. Neil Barofsky, the official watchdog over the Treasury’s Troubled Asset Relief Program (TARP), said the Federal Reserve could have “just tried a little harder” in its efforts to get AIG’s creditors to accept some losses on their investments in the troubled company.

Mr. Barofsky said that greater efforts at moral suasion – telling banks such as Goldman Sachs to accept some losses for the good of the country – might have saved taxpayers some money as the bailout began. But he acknowledged that “we just don’t know the answer.”

Wednesday’s hearing came at a sensitive time, when President Obama is facing political pressure to reframe his economic policies and many Americans believe Wall Street has gained from bailouts while problems on Main Street haven’t improved.

Republicans and Democrats both take aim

Against that backdrop, the rhetoric at the hearing was heated – with Geithner under fire from both Democrats and Republicans.

His spirited defense of the AIG bailout doesn’t end questions about his own job security. And some lawmakers including Rep. Darrel Issa (R) of California are pursuing the release of new documents regarding AIG, so the bailout probe isn’t over.

But various testifiers contended that the Federal Reserve Bank of New York – at which Geithner was president at the time – had little leverage to extract so-called “haircuts” from Goldman Sachs and other AIG creditors.

“Even in a best-case scenario, we did not expect that the counterparties would offer anything more than a modest discount to par,” Thomas Baxter, general counsel for the New York Fed, said in written testimony.

Fed officials sought concessions from eight AIG creditors. But their priority was on ensuring that AIG was not threatened with credit-rating downgrade, which would occur if the firm failed to reach a deal with creditors by Nov. 10, 2008. The Fed arranged for creditors to be paid in full, rather than face renewed risk of an AIG bankruptcy just a few weeks after the government had first intervened to save the firm.

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