Treasury Secretary Timothy Geithner denied any role in disclosures about American International Group's payments to banks and defended his decisions as New York Federal Reserve chief to pay full price to retire AIG credit default swaps.
Geithner, in prepared testimony for a much-anticipated congressional hearing on Wednesday, said protracted demands for concessions from banks in late 2008 could have triggered devastating credit rating downgrades and brought AIG down, with "catastrophic" consequences for the U.S. economy.
Geithner's testimony is widely seen as important for his future as Treasury chief. He has denied acting in the interests of specific institutions.
"I had no role in making decisions regarding what to disclose about the specific financial terms of Maiden Lane II and Maiden Lane III and payments to AIG counterparties," Geithner said, referring to Fed investment vehicles that bought securities from the banks.
The remarks were made available late on Tuesday.
Geithner, who ran the New York Fed at the time of the bailout, faces a grilling by the House of Representatives Oversight and Government Reform Committee, which is re-examining AIG's payment of $62.1 billion to bank counterparties to close out trades made before and after the insurer was rescued.
Republican lawmakers on the panel have accused the New York Fed under Geithner of wasting billions of taxpayer dollars by failing to negotiate concessions from the banks and then trying to suppress public disclosures about the payments.
"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," Geithner said.
Henry Paulson, Geithner's predecessor at the Treasury, will tell the panel that he, Geithner and Fed Chairman Ben Bernanke "acted properly" in rescuing AIG, according to testimony released on Tuesday.
"If AIG collapsed, it would have buckled our financial system and wrought economic havoc on the lives of millions of our citizens," Paulson said in the prepared remarks.
The endorsement of Bernanke could help shore up support among U.S. senators who are wavering in their support of a second term for the Fed chairman, rattling investors around the world.
The New York Fed's top lawyer said on Tuesday that the Fed "actively supported" AIG's regulatory requests to keep its bank counterparties confidential but did not pressure the bailed-out firm for secrecy.
General Counsel Thomas Baxter said that the Fed's sole aim in keeping some information from public view was to preserve the value of taxpayer assets.
"Some have suggested that in November 2008, AIG had planned to disclose the identities of the CDS counterparties and that the New York Fed pressured or compelled AIG not to," Baxter said in his prepared remarks for the hearing. "This is not true."
Baxter said the New York Fed's only interest in the confidentiality requests, particularly for details of individual securities, was preserving the value of taxpayer investments in AIG and in securities purchased by a Fed investment vehicle, Maiden Lane III.
"To be sure, the New York Fed actively supported the idea of keeping this information confidential, but once again, only to maximize the value of the Maiden Lane III portfolio for the benefit of the taxpayer," Baxter said in the testimony.
He also defended the New York Fed's decision to pay par value for the securities underlying the credit default swaps, despite criticism that it did not try hard enough to wring concessions from banks, including Societe Generale, Goldman Sachs Group Inc and Deutsche Bank AG.
Neil Barofsky, the special inspector general for the U.S. bailout program, said in his prepared remarks to the panel that the French bank regulator had indicated that it was open to further talks on concessions.
U.S. Rep. Darrell Issa, the committee's top Republican who has spearheaded an investigation into AIG's payments to banks, has accused the New York Fed of orchestrating a "cover up" of the payments to avoid public scrutiny.
Issa, a Californian, said in a Republican staff report to the committee that email traffic showed the New York Fed directed its attorneys to edit AIG's filings with the Securities and Exchange Committee to make them more difficult to understand.
The Fed "likely wasted" billions of taxpayer dollars by paying par value to banks for securities backing the AIG derivative contracts, he charged.
"The secrecy, concealment and lack of transparency in the Federal Reserve's actions have important implications for the continued health of democracy and free markets," Issa wrote in his report.
The committee's majority Democratic staff, however, said that there was no evidence in any documents to suggest that Geithner himself knew about AIG's plans or counseled AIG not to disclose payments it was making to banks.
But the Democrats added: "We now believe that the NYFRB should have forced the counterparties to take less than 100 cents on the dollar."
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