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Lawmakers, AIG's Rescuers Spar at Hearing

Source: WSJ

Posted on 27 Jan 2010

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U.S. lawmakers blasted decisions that allowed American International Group Inc.'s major trading partners to make out with billions, as the architects of the government's 2008 response to the financial crisis defended their actions.

"In effect, the taxpayers were propping up the hollow shell of AIG by stuffing it with money, and the rest of Wall Street came by and looted the corpse," Rep. Edolphus Towns (D, N.Y.) said in opening remarks before a standing-room only crowd in a Capitol Hill hearing room on Wednesday.

Rep. Darrell Issa (R, Calif.) told reporters ahead of the hearing he has "lost confidence" in Treasury Secretary Timothy Geithner, who was head of the Federal Reserve Bank of New York when the government made the controversial decision to rescue AIG, in part by paying the insurer's counterparties a total of $62 billion to tear up troubled insurance contracts, at the height of the financial crisis.

Mr. Geithner, former Treasury Secretary Henry Paulson, and the New York Fed's top in-house lawyer are expected to be grilled Wednesday by the House Committee on Oversight and Government Reform, which has subpoenaed more than 250,000 pages of internal documents on the AIG deliberations. Lawmakers have focused on documents that show little effort was made to negotiate with AIG's trading partners, and that after the rescue, Fed officials sought to hamper efforts to disclose the names and amounts big banks received.

As a group, Messrs. Geithner and Paulson as well as New York Fed General Counsel Thomas Baxter defended their actions in the final four months of 2008.

"We did not act to protect the financial interests of individual institutions. We did not act to help foreign banks," Mr. Geithner said in his prepared remarks, asserting that officials acted in what they believed to be the best interests of the American people.

He also said that he personally had no role in making decisions "regarding what to disclose about the specific financial terms" of the November 2008 rescue.

Mr. Paulson distanced himself from the AIG decisions, saying he had no personal role in the November 2008 decisions that led to the counterparty payments. But he said he supported the effort and said the government could not have let AIG face almost certain failure.

"I believe we would have seen a complete collapse of our financial system and unemployment easily could have risen to the 25% level reached in the Great Depression," Mr. Paulson said in his remarks.

Federal Reserve Chairman Ben Bernanke said in a letter that the health of AIG's major trading partners wasn't a factor in the government's negotiations over the insurance contracts.

"Whether the individual counterparties were in relatively sound financial condition or not was not a factor in the decision regarding the amount paid to the counterparties or whether concessions should be sought from them," Mr. Bernanke said in a letter to Rep. Issa.

Mr. Bernanke said he supported the Fed's decision but wasn't a party to the negotiations.

"I was not directly involved in the negotiations with the counterparties," Mr. Bernanke wrote, noting that the counterparty payments helped "remove an enormous obstacle to AIG's financial stability."