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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.

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Baxter also sought to fend off angry questions about why the Fed did not disclose to the public until the following spring that creditors had been paid in full.

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The AIG bailout has become the poster child for wider public outrage over the financial crisis and its impact on ordinary Americans. Mr. Barofsky said that Treasury financial statements point to expected losses to taxpayers of about $30 billion.

With unemployment at 10 percent, President Obama has been scrambling to rebuild trust in his economic policies. He has also recently proposed a bank tax designed to recoup “every last dime” spent on bailouts, including that of AIG.

Some lawmakers said Geithner should resign, while others accused him of ducking questions.

More to the story?

“We’re not getting the whole story,” said John Mica (R) of Florida. “We’re getting a lame story [about a bailout] for which American taxpayers will stay on the hook.”

In response, Geithner mounted an energetic defense of his actions, plus a warning: If AIG had gone into default, at that time of wider market panic following the collapse of Lehman Brothers, he said the whole economy would have faced disaster.

Henry Paulson, who was Treasury secretary at the time, echoed that view later in the hearing. He said failure to prop up AIG could have resulted in a 25 percent jobless rate, matching the Great Depression, amid a collapse of the financial system.

Geithner rejected the view, posed by some lawmakers, that bankruptcy might have been a viable alternative for AIG, in which the firm’s insurance business would have survived unscathed.

Role of 'credit default swaps'

Geithner painted a picture of AIG as a collection of intertwined entities. It appeared impossible, he said, to wall off its insurance operations – although they were considered solvent on their own – from the risk posed by the parent company’s financial operations. Exposure to bad real estate loans and risky investments known as credit default swaps threatened to leave the firm without the capital needed to fund itself.

The hearing still left what one lawmaker called “bad optics.”

The most successful Wall Street firm, Goldman Sachs, got billions in payouts passed to it from taxpayers with AIG as a conduit. Secretary Paulson is a former Goldman CEO. Secretary Geithner’s chief of staff is a former Goldman employee. And in response to questioning, Geithner said that, although he recused himself from key Fed decisions after being nominated by Obama to be Treasury Secretary, he did not sign a document to that effect.

Both the AIG bailout’s critics and supporters appeared to agree on one thing – the imperative to fix the regulatory system so that the government does not face a similar mess in the future.

“No one, me included, likes to see private business profit from taxpayer assistance,” Paulson said. “I just hope part of that anger … is an incentive to fix the system.”

He and Geithner both called for new “resolution” authority for the government to take over and to liquidate non-bank financial firms, outside of bankruptcy, if they are on the brink of failure.

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