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Geithner on AIG: The Explanation

It was a tough morning for Treasury Secretary Tim Geithner, summoned to Capitol Hill to testify on the decision-making surrounding the federal bailout of American International Group, which ultimately received more than $180 billion in taxpayer cash.

The controversy in recent weeks has centered not on the money that went to AIG, but the money that went through AIG to some of the other Wall Street giants to which AIG owed cash. In the process, AIG paid those firms, including Goldman Sachs, 100 cents on the dollar — an arrangement that some Fed officials lobbied (unsuccessfully) to conceal from the public. Geithner on Wednesday reiterated his earlier statement that although he was head of the New York Fed at the time, he took no part in the decisions surrounding disclosure of those payments. He also defended the decision to allow AIG to pay back Goldman and the others on par, arguing that the only legal way to ask those firms to accept less would be to allow AIG to default — a scenario, he said, that would have devastated the financial sector and the economy as a whole.

The counterparties held insurance entitling them to full or par value of the contract. We could not credibly threaten not to pay. That meant putting AIG into bankruptcy. At the time, we were working desperately to rebuild confidence in the financial system. Any suggestion that we might let AIG fail would have worked against that vital aim. We could not risk a protracted negotiation.

Lawmakers, for their part, were having none of it. Rep. Marcy Kaptur (D-Ohio) implied that finance officials put the interests of Goldman above those of taxpayers. Rep. Dan Burton (R-Ind.) said “it stretches credibility” that Geithner, as head of the New York Fed, wouldn’t have been involved in the disclosure discussions. Rep. Stephan Lynch (D-Mass.) wondered why officials “scalped” the shareholders of Bear Stearns, but made sure to pay off Goldman in full. Rep. John Mica (R-Fla.) simply asked Geithner to resign.

The hearing, called by Democrats, highlights the pickle facing the White House in a tough election year. In short, the Obama team chose Geithner because, as a friendly face to Wall Street, he could step into the Treasury spot without scaring the hell out of the banks. (Indeed, the markets soared when the country learned of Obama’s choice.) But he hardly fits the populist image that the administration is hoping to resurrect after the special Senate election in Massachusetts last week — a wake-up call to Democratic leaders who are scrambling to reframe their message before November.

Two questions for the White House: (1) Can you keep Geithner in place and still create the impression among disgruntled voters that you’re serious about taking on Wall Street? And (2) if you choose to replace Geithner, who could fill the office and be the face of populism without causing the markets to tank?

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