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.
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.
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.
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?
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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