Obama’s Treasury secretary came under heavy fire on the Hill, brushing off attacks on the AIG rescue and calling for tough new regulation, but Allan Dodds Frank says his testimony may have saved his job. Plus, our Big Fat Story on who's gunning for Geithner.
Treasury Secretary Timothy Geithner delivered a dramatic, potentially job-saving performance before Congress on Wednesday, calling for real regulation of financial institutions and revealing how close the collapse of American International Group came to triggering a worldwide depression in September 2008.
In what was billed beforehand as a make-or-break appearance in front of a hostile congressional committee, Geithner characterized AIG as an out-of-control global octopus that never should have been allowed to elude proper government supervision for decades and grow into a monster that threatened the world economy. (At the time the government moved in and took a 79.9 percent stake, AIG had hundreds of subsidiaries in more than 130 countries and had more than $400 billion outstanding in credit default swaps.)
“We did not act to protect the financial interests of individual institutions.”
When Rep. William Clay (D-MO) asked about AIG’s “tentacles,” Geithner said, “That is exactly the right question,” and went on to explain that “AIG was so large and so interconnected and the system was so fragile” that you “had a world that was burning and the entire system was at stake.”
• Big Fat Story: Who’s Gunning for Geithner? When AIG came calling for help in September 2008, Geithner was president of the New York Federal Reserve. As the company revealed the extent of its losses to the New York Fed, Geithner said he realized that the fate of the global insurance conglomerate could not be left to the free market and bankruptcy court. He argued that further downgrades of AIG by credit agencies would have so strained the company’s credit lines that the company’s creditors would have forced the company into bankruptcy, an action he contends would have triggered a worldwide depression.
“We did not rescue AIG,” Geithner said. “We intervened, so we could dismember it safely.”
That view was reinforced by former Treasury Secretary Henry Paulson, who said forcing AIG into bankruptcy was not an option, nor was isolating the damage done by AIG.
“There were very few days to act,” Paulson testified. “I believe it would have taken down our whole financial system and the economy. It would have been a disaster… We could have easily had unemployment equaling or exceeding 25 percent unemployment, as it was in the Great Depression.”
Pressed by Rep. Cliff Stearns (R-FL) about the assertion by a state insurance commissioner that AIG’s insurance companies were perfectly safe and would have been protected in bankruptcy, Paulson called AIG a prime illustration of the need for more regulation: “The company had a huge problem…There was no regulator who had a clear line of sight on the company.”
Geithner, in particular, was on the hot seat as he faced questions from the House Oversight and Government Regulation Committee. The committee’s stated purpose was to ask about whether details of the government bailout of AIG had been covered up, and whether the government’s actions had unfairly benefited Goldman Sachs and other banks that got 100 percent of the money owed to them as counterparties in AIG’s credit default swaps.
In November 2008, the government agreed to pay AIG’s bank creditors $62 billion. At the time, regulators decided not to make any of the details of the AIG deals public. Emails uncovered by the committee suggested that the Fed may have told AIG not to reveal details in its filings with the Securities & Exchange Commission.
Geithner deflected the inquiries by denying responsibility: He was unaware of the decisions about paying counterparties, he said, as he had essentially recused himself by then after being chosen as President Obama’s Treasury secretary.
Instead of sinking into his chair at the witness table, Geithner deftly flicked away accusations that the decisions about paying counterparties were part of a conspiracy to benefit Goldman Sachs.
As Geithner put it in one exchange: “We did not act to protect the financial interests of individual institutions. We did not act to help foreign banks. We acted because the consequences of AIG failing at that time, in those circumstances, would have been catastrophic for our economy and for American families and businesses.”
Among other things, Geithner seemed to make clearer than ever the reality that the government—especially after the fall of Lehman Brothers in September 2008—was in a total panic.
One question the committee might have asked Geithner and Paulson, but didn’t, is whether they covered up the real cost of the AIG bailout on Sept. 16, 2008, the day they announced it as an $85 billion transaction.
Government funds committed to the AIG bailout topped out at $182.5 billion, before asset sales and recovering markets began reducing that number.
Allan Dodds Frank is a business investigative correspondent who specializes in white-collar crime. He also is president of the Overseas Press Club of America.