Geithner will defend secretive AIG bailout deals

[February 04, 2010]  WASHINGTON (AP) -- Treasury Secretary Timothy Geithner responded to a rising chorus of questions about controversial bailout deals Thursday, defending decisions that funneled billions to Wall Street banks.

Geithner said the "backdoor bailouts" of Goldman Sachs Group Inc. and others were necessary and agreed to appear before a House committee probing his handing of the $182 billion rescue of American International Group Inc.

Geithner said he will appear at a hearing of the House Committee on Oversight and Government Affairs later this month to discuss the matter.

Hours earlier, the chairman of the House Financial Services Committee said his panel also will investigate bailout decisions Geithner signed off on when he was president of the Federal Reserve Bank of New York.

The New York Fed paid billions to banks to satisfy financial commitments AIG had with them. The deals might have cost taxpayers billions more than necessary because Geithner declined to demand concessions from the banks, an earlier watchdog report said.

Treasury and the Federal Reserve refused to say which banks benefited from the "backdoor bailouts" or how much money they got until after it was disclosed in news reports. Banks including Goldman, Morgan Stanley, Deutsche Bank and Societe Generale benefited from the deals.

AIG had been negotiating the values of banks' contracts before the government took it over in September 2008, according to published reports. Geithner considered reducing the payments for two days before paying the banks off in full.

The oversight committee is investigating why the banks were paid in full and why officials including Geithner refused to name them.

Separately Thursday, House Financial Services chairman Barney Frank, D-Mass., sought to shift attention to the roles of former Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke -- two Bush appointees who also were pivotal in the AIG decisions.

Paulson and Bernanke "outranked" Geithner, Frank said in a statement. Frank was heeding Republican calls to investigate the AIG matter.

The oversight committee's top Republican said Thursday that its investigation "is not and has never been about Tim Geithner."

California Rep. Darrell Issa called for Geithner to testify after obtaining e-mails in which New York Fed lawyers told AIG to keep bailout details secret. Geithner recused himself from AIG matters before the e-mails were written but ran the New York Fed during the "backdoor bailouts."

Issa said Thursday he is concerned about the Fed's secrecy in light of a proposal to expand its role overseeing the financial system.

Oversight committee Chairman Rep. Edolphus Towns, D-N.Y., said Thursday that Geithner will appear at a hearing on Jan. 27. He invited testimony from three other key players: Neil Barofsky, the special inspector general who prepared the report; New York Fed general counsel Thomas Baxter; and Elias Habayeb, the former chief financial officer of the AIG division that sold the financial contracts to banks.

Towns subpoenaed the New York Fed for Geithner's e-mails and phone logs related to AIG. Issa requested the subpoena after the Fed blocked Barofsky's office from turning over documents he used to prepare an audit criticizing Geithner.

The probe will give a fuller picture of the largest bailout of the financial crisis. The government's rescue of AIG sparked public outrage and contributed to calls for financial reform.

The New York Fed managed the AIG bailout, spending billions on bonds that AIG had insured. The bonds were losing value, and AIG was on the hook for far more than it could afford without a government rescue.

Officials managing the bailout believed that letting AIG fail would spread financial panic. The New York Fed decided to cancel the contracts by buying the bonds from banks at face value.

Geithner signed off on the decision not to demand concessions, even though there were no other buyers and the bonds were likely worth far less than the New York Fed paid.

The Senate is negotiating a compromise on a proposed overhaul of financial regulation. Lawmakers disagree about proposals to expand the Fed's powers and to establish a system for temporarily bailing out large financial firms while they are dissolved.

Treasury spokesman Andrew Williams did not respond requests for comment.

In an interview broadcast on CNBC Thursday, Geithner said he was "very confident" in his decision to pay the banks in full rather than forcing concessions.

"We had no choice at the time other than to do this" because there were "no effective legal means" to do otherwise, Geithner said. He confirmed earlier reports that he had agreed to testify before the oversight panel.

[Associated Press; By DANIEL WAGNER]

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