ARI SHAPIRO, Host:
President Obama's treasury secretary took heat from both parties at a congressional hearing yesterday, and President Bush's last treasury secretary fared no better. Tim Geithner and Henry Paulson tried to defend the government's $180 billion bailout of insurance giant AIG. The company paid off its trading partners, including some of the world's biggest banks, with government money, and the House panel wasn't happy about it. NPR's Jim Zarroli reports.
JIM ZARROLI: In September 2008, during the waning days of the waning days of the Bush administration, regulators were desperately trying to contain a financial crisis that was spiraling out of control. One of the biggest problems was AIG, which had underwritten an unfathomable number of derivatives contracts. Its tentacles spread throughout the global economy. Former Treasury Secretary Paulson.
HENRY PAULSON: If AIG collapsed, it would've buckled our financial system and wrought economic havoc on the lives of millions of our citizens.
ZARROLI: The problem was that AIG depended on the bond market for funding, and with the financial market seizing up, it was having trouble making good on its contracts. Treasury Secretary Geithner, who at the time headed the Federal Reserve Bank of New York, said there was a real risk it would default on its debts.
TIMOTHY GEITHNER: The Federal Reserve faced a terrible choice: to support AIG, putting billions of dollars of taxpayer resources at risk, or to let AIG fail and accept potentially catastrophic damage to the economy. We were not willing to accept such a catastrophe.
ZARROLI: The answer, says Thomas Baxter, general counsel of the New York Fed, is that U.S. officials had little leverage over the banks. Baxter says normally, when a big company like AIG runs into trouble, its creditors are willing to negotiate over its debts, because they're worried it will go into bankruptcy if they don't. But Baxter says once U.S. officials agreed to backstop AIG, everyone knew the government wouldn't let that happen.
THOMAS BAXTER: First, that threat was not credible given the actions of September 2008. Second, that threat of bankruptcy was not true. We weren't prepared to put AIG into bankruptcy in November of 2008.
ZARROLI: But members of Congress remained angry, and they pointed to another issue: Emails released by the committee suggest that Fed officials put pressure on AIG not to publicly release details of the bailout. Geithner insisted that he had no role in the decision, but Florida Congressman John Mica was skeptical.
JOHN MICA: I'm telling you, I believe these are lame excuses. Either you were in charge and did the wrong thing, or you participated in the wrong thing.
ZARROLI: Another member of congress said this whole deal stinks to high heaven. Geithner bristled with anger as he defended himself.
GEITHNER: I have worked in public service all my life. I have never been a politician. I have served my country as carefully and ably as I can. And it is a great privilege to me for me to work with this president to help repair the damage that was here when we took office.
ZARROLI: Jim Zarroli, NPR News.
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