Geithner Testifies: What Did He Decide About AIG Payouts?

Treasury Secretary Timothy Geithner was summoned to testify before the
House Committee on Oversight and Government Reform yesterday in order to
answer two questions: why did he sign off on AIG paying the Big Banks
full value on insurance for bad assets like mortgage-backed
securities--using $62 billion in taxpayer money--at a moment when
everyone else was taking losses? And what was his role in the decision
not to disclose to the public--which owned 80 percent of AIG
at the time--the names of the banks and the payments they received, as AIG was
prepared to do before the Federal Reserve Bank of New York (FRBNY) run
by Geithner advised them not to?

Geithner's answer boiled down to this: the decision in early November
2008 to pay the Goldman Sachs, Bank of America, Merril Lynch, Citigroup,
Societe Generale, Deutsche Bank and others 100 cents on the dollar was
part of a broader effort to save AIG and it prevented an economic
catastrophe; and on November 24, 2008, when he was nominated to serve as
Treasury Secretary, he recused himself "from involvement in monetary
policy decision, policies involving individual institutions, and
day-to-day management of FRBNY." (Was there anything left for him to do
around the joint? And why was he still getting a paycheck?) Geithner
said he therefore had nothing to do with the non-disclosure decision in
December 2008.

But Geithner didn't recuse these AIG matters up from his office, he
recused them down to the vice president of the NY Fed. Apparently,
decision-making over tens of billions of dollars of taxpayer money
wasn't deemed a top-level priority by him or his predecessor, former
Treasury Secretary Henry Paulson, who also testified. In fact,
Congresswoman Marcy Kaptur discovered through her questions that no
formal recusal agreement outlining Geithner's new responsibilities (or
lack thereof) was ever executed.

Geithner argued that the New York Fed was operating under a gun. In
November 2008, credit rating agencies--the same ones that gave
mortgage-backed securities their highest AAA rating--were about to screw
us again by downgrading AIG's credit rating when taxpayers had already
handed the company an $85 billion bailout in September. A downgrade
would require AIG to pay out tens of billions of dollars more in
collateral payments to the banks on the credit default swaps (insurance
on the bad assets)--money that it didn't have and that Geithner
maintained would force the company to collapse. Geithner said AIG's
failure would cause an "utter collapse"--a run on banks, thousands of
factories closed, millions of more Americans losing jobs, savings and
home values even more devastated. Paulson said unemployment would have
been upwards of 25 percent.

AIG had already begun asking the banks for concessions, or "haircuts,"
on these contracts. Only USB agreed to consider a 2 percent reduction
in payments--and only under the condition that the other financial firms
agreed to it as well. According to Geithner, the New York Fed decided
there wasn't sufficient time to negotiate. AIG was about to report an
earnings loss of $25 billion on November 10 which would have resulted in
a credit downgrade. Geithner argued that even the haircuts themselves
could have led to a downgrade and consequent collapse.

But Democratic Congressman Stephen Lynch of Massachusetts wasn't buying
it. He pointed to Bear Stearns, and the fact that then-Secretary
Paulson, Fed Chairman Ben Bernanke, and Geithner forced the firm to
accept 2 cents on the dollar for their shares in order to receive
bailout money. How was it Goldman and the other firms got such a sweet
deal on this backdoor bailout via AIG?

"The money going into AIG is going right out to the counterparties,"
said Lynch. "This is a pass-through. And the folks on the other side
are Goldman Sachs--that's a principal beneficiary. And we don't
negotiate a nickel--not a nickel, not a cent--off of what they're
getting. You're saying, 'Oh, the regulations were different.' Let me
tell you something, you were changing the rules and regulations every
single day. You had every opportunity--every opportunity to weigh in on
behalf of the American people and make these people take a new deal,
make them take a haircut. You scalped the folks at Bear Stearns--2
cents on a dollar, they got. The folks at Goldman Sachs got a hundred
cents on a dollar. That is just unacceptable. Totally unacceptable."

Lynch was fuming and went on to address the recusal issue. "Changing
over to the Obama Administration--you get the same people who are
relying on you. The American taxpayer when you're in one job, and the
American taxpayer when you're in the other job," he said. "I don't see
a conflict. You could have done the right thing by those people, and it
just stinks to high heaven, what happened here. And to top it all
off--the disclosure was not there. The disclosure was not there at the
proper time to tell the American people, to tell this Congress, what was
going on. And that is just inexcusable. And it makes me doubt your
commitment to the American people. And I think the commitment to
Goldman Sachs trumped the responsibility that our officials had to the
American people."

(So where exactly was Lynch when the Democratic primary for the
Massachusetts Senate seat rolled around?)

"If it would have been possible, we would have done it," Geithner
replied. "Why would I have wanted to be sitting before you today having
to defend actions that look like they could have been avoided?
It comes down to this basic tragic choice: if you are prepared to
default, you can impose haircuts. If you can't accept the consequences
of default, you do not have any leverage. It would have been vastly
more expensive to the American taxpayer...if we had let that firm fail."

"There was no shared sacrifice for Goldman Sachs and the American
people," Lynch shot back.

One witness on the third panel also questioned Geithner's version of
things--Neil
Barofsky, the special inspector general for TARP (SIGTARP).

Barofsky took on the "tone and amount of effort" in the negotiations for
concessions from the Wall Street and foreign banks. He said they were
handled over the telephone by mid- and senior-level executives. These
Fed officials informed their counterparts at the financial firms that
negotiations were voluntary, and then asked would they be willing to
take a haircut? Seven of the eight said no, and Secretary Geithner then
made the decision to pay full value on the contracts.

Barofsky said this "stands in stark contrast" to negotiations just a few
weeks earlier when the US purchased $125 billion in preferred securities
from nine banks--some of the same ones involved in the AIG
negotiations--through TARP. The bank CEOs were summoned to a Treasury
conference room in Washington, DC. NY Fed President Geithner, Secretary
Paulson, and Fed Chairman Bernanke were all present and insisted the
banks take the money.

"Unlike with AIG, the message was forceful," said Barofsky. "[They]
made it very clear how important it was for the banks to agree. They
used terms like 'it would be good for the country' for them to do so.
No such similar effort was taken with respect to the AIG negotiations.
Would it have made a difference? If President Geithner or Secretary
Paulson got on the phone and talked with those chief executive officers,
would it have resulted in the savings of billions or tens of billions of
dollars for the US taxpayer? We don't know. We can't know. We'll
never know, because that effort was simply not taken."

Barofsky also expressed concerns about a continuing lack of transparency
around these matters. Documents regarding the AIG payments to the banks
that were obtained by the Oversight Committee should have been turned
over previously to SIGTARP for its investigation into these matters last
year. Barofsky said that he will investigate "whether there was any
misconduct relating to disclosure or lack thereof."

Florida Republican John Mica asked for Geithner's resignation--but
mostly the Republican members wore their newfound populism like a kid
forced to don a tie at church. Congressman Lynch gave Geithner that
one serious dressing down. And Representatives Kaptur and Dennis
Kucinich pressed the Secretary hard on how and why he made the decisions
he made.

But in the end, there was no smoking gun in the 250,000 documents
examined by the Committee. Nothing to prove what Geithner knew about
the non-disclosure, and when he knew it. No damning e-mail from him
reassuring friends on Wall Street that this was all going to be taken
care of.

Just the same question that has loomed over Geithner since his
nomination: is this really the man the President wants presiding
over key aspects of his economic recovery plan? And is this man capable
of putting the people's interests before the interests of Wall Street?