Geithner Draws Fire Defending AIG Bailout

Democrats and Republicans alike pummeled Treasury Secretary Timothy Geithner today over his role in the $180 billion bailout of insurance giant AIG Inc., venting public anger over Wall Street's return to prosperity while unemployment stands at 10 percent.

Geithner, one of the original architects of the government's 2008 response to the financial crisis as president of the Federal Reserve Bank of New York, defended the use of taxpayer money as necessary to head off "potentially catastrophic damage to the economy."

But members of the House Committee on Oversight and Government Reform hammered away at why regulators allowed American International Group to pass on billions of the bailout money to big Wall Street and international banks that were business partners.

"In effect, the taxpayers were propping up the hollow shells of AIG by stuffing it with money. And the rest of Wall Street came by and looted the corpse," committee chairman Edolphus Towns, D-N.Y., told Geithner.

Geithner clearly was getting no cover from committee Democrats on the day that President Barack Obama was to give a State of the Union address intended to assure Americans he shares their economic priorities.

Rep. Marcy Kaptur, D-Ohio, suggested Geithner was more beholden to banking interests than to taxpayers at the New York Fed and cut him off abruptly when he tried to deny it.

Kaptur later called Geithner's performance weak and said it showed that "he shouldn't have been appointed in the first place." She said in an interview that he should go "but removing him would be an empty change without eliminating the revolving door between Washington and Wall Street."

Both Geithner and Federal Reserve Chairman Ben Bernanke have found themselves on the defensive, both targets of political discontent and rising voter anger over bailouts and bonuses.

Bernanke was scrambling for support for confirmation for a second term. And Geithner faced speculation over whether his influence was fading after Obama reset his economic priorities to go with a far more aggressive attack on Wall Street and large banks that had been recommended by former Fed Chairman Paul Volcker.

But if Geithner risked being hung out to dry by the administration, it was not obvious in his testimony, in which he swung back hard against congressional criticism.

"Deciding to support AIG was one of the most difficult choices I have ever been involved in, in over 20 years of public service. The steps that were taken were motivated solely by what we believed to be in the public interest," Geithner said.

He also repeated an insistence that he played no direct role in AIG deals to pay back banks that were business partners or in withholding information about them from the public.

AIG eventually received an aid package from the government of more than $180 billion. The committee subpoenaed 250,000 pages of documents from the Fed. Lawmakers want to know why so many bailout dollars were funnelled to big banks with deals with AIG and revelations that officials from the Treasury Department and the New York Fed worked to keep the details of such decisions from the public.

Bernanke also told the panel he was "not directly involved in negotiations" on payments from AIG to big banks such as Goldman Sachs and other Wall Street firms. Those negotiations were handled primarily by the staff of the New York Fed, he said. Bernanke made the comments in written responses to questions posed by Issa.

Neil Barofksy, the special inspector general for the $700 billion bank bailout program, told the committee the New York Fed should have put "just a little effort" into trying to strike a better deal for taxpayers by getting banks owed money by AIG to accept less than 100 cents on the dollar.

But Thomas Baxter, general counsel of the New York Fed, testified that dragging out negotiations further would have resulted in AIG being "downgraded by the credit rating agencies and thrown once again to the brink of bankruptcy."

Although Bernanke and Geithner have taken the most heat, the government's bank rescue effort began under former President George W. Bush and Henry Paulson, his Treasury secretary.

Paulson defended his role. "An AIG failure would have been devastating to the financial system and the economy," he told the committee.

Rep. Elijah Cummings, D-Md., asked Paulson if he understood the anger that ordinary people were feeling toward Wall Street barons who play golf with each other and are "looking out for themselves" while the rest of the country suffers.

Associated Press writers Jeannine Aversa and Jim Kuhnhenn contributed to this report.