The Federal Reserve had no choice but to pay off AIG's trading parties, including Goldman Sachs and other major banks, because any attempts to negotiate a better deal for taxpayers could have triggered a new financial panic, the US Treasury Secretary Tim Geithner insisted under questioning from Congress yesterday.
Lawmakers are examining $62bn (£38bn) in payments made in November 2008, which critics say amounted to a "backdoor bailout" of Wall Street and was then covered up by officials at the US central bank.
Mr Geithner, who ran the New York branch of the Fed before joining the Obama administration, dismissed suggestions that he should have demanded Wall Street banks take "haircuts" on their AIG positions, instead of expecting 100 cents on the dollar.
"If you are prepared to default, you can impose haircuts," the Treasury secretary said. "If you cannot accept the consequences of default, you do not have any leverage."
AIG was the world's largest insurance company when it came to the brink of collapse in the September 2008 financial panic and was, in effect, nationalised by the US government in what seems likely to be one of the most costly parts of the bailout of the financial system.
Channelling public anger, the House of Representatives' oversight committee called Mr Geithner and his predecessor as Treasury secretary, Hank Paulson, before a hearing on the AIG debacle yesterday and asked them to defend their actions. Republican Michael Turner called the $62bn payouts to Wall Street "the largest theft in history".
By November 2008, the Fed was still fighting to prevent AIG's collapse, Mr Geithner said. Threatening to default on its obligations to the banks could have prompted them to put the company into bankruptcy, he said, and even asking them to take a haircut could have prompted a credit rating downgrade of AIG that would also have collapsed the company. Instead, Goldman, Barclays, Société Générale and 13 other banks were paid so that AIG could take over the collateralised debt obligations that underlay its credit default swap positions. Mr Geithner said that AIG will ultimately make a profit on that deal, despite the controversy.
He also moved to disown Fed officials' efforts to keep the payments secret, efforts that were revealed in a slew of emails reviewed by the oversight committee. He said he took no part in those discussions and it would be "reasonable" to have hoped the payments would have been disclosed.
Mr Paulson said he was confident the Fed acted appropriately.Reuse content