WASHINGTON — Facing a rising tempest and new investigations, Treasury Secretary Timothy Geithner on Wednesday will defend before Congress his 2008 decision to use taxpayer bailout money to pay major banks the full $62 billion face value of bets made on risky offshore securities.
Geithner, who headed the Federal Reserve Bank of New York at the height of the financial crisis, will not be alone in giving sworn testimony to members of the House Oversight and Governmental Affairs Committee skeptical about the handling of the massive rescue of the American International Group.
He will be joined by his predecessor at Treasury, Henry Paulson, who's expected to be asked whether he "picked up the phone" or took any other action to force banks to accept a discount on the insurance-like contracts, a committee staffer said.
Paulson is a former chairman of Goldman Sachs, the world's premier investment bank, which reaped $13.9 billion in tax dollars from AIG on contracts called credit-default swaps.
The House committee, which has been combing through 250,000 subpoenaed records from the New York Fed since last week, also is examining whether the agency sought to keep secret for months the generous payouts to 16 banks as part of the AIG rescue.
Newly released e-mails show that Geithner's aides were trying to keep those terms hushed in late 2008, pressing AIG officials not to disclose the full payments. While a couple of news stories and financial analysts' reports made fleeting mention of the decision to pay 100 cents on the dollar on the swap contracts, Congress didn't focus on those deals until March, well after Geithner won Senate confirmation to his Cabinet job.
Officials at the New York Fed said that the e-mails have been misconstrued.
In testimony prepared for delivery to the committee, Neil Barofsky, the special inspector general assigned to track the use of federal bailout money, said that the banks were "effectively paid full face . . . value of the credit-default swaps, an amount far above their market value."
Barofsky said he's ordered an investigation into the lack of "transparency" by Geithner's Treasury Department, including its recent assertions that taxpayers likely will profit from the deal, when losses are likely to exceed $30 billion. He said his office also would investigate whether it received full cooperation from the Federal Reserve when it recently investigated the decision to pay 100 cents on the dollar on the swap contracts.
As proof of its uncooperativeness, Barofsky said the congressional committee received documents that his auditors did not.
It seems clear that some lawmakers have Geithner and Fed Chairman Ben Bernanke in their sights, as new details emerge about the AIG rescue, including allegations that it was used to engineer a "backdoor bailout" of Goldman and other big banks. Bernanke faces opposition for reconfirmation to a second term.
"The 250,000 documents we received from the New York Fed paint a startling picture," said Rep. Darrell Issa, a California Republican who's been pushing the investigation. "It is clear that the financial elites at the Federal Reserve felt it was more important to take care of wealthy Wall Street firms than to protect the taxpayer investments.
"Fed officials mocked the idea of transparency, while doing everything they could to ensure the public never knew about the billions they funneled to private firms."
Geithner already has survived a rocky ride, with some Republicans first calling for his ouster last spring. Paulson, who served as Treasury secretary during the tumultuous 18 months leading up to and including the meltdown, is writing a book on the financial crisis and has been largely out of sight for months.
In his prepared testimony, Paulson defended the AIG rescue as "correct," but said he was "not involved in any of the decisions" about the swap payments to the banks.
McClatchy obtained testimony prepared for the hearing and a staff memo drafted for Republican panel members. They offer two sharply conflicting pictures of the events surrounding the bailout.
Thomas Baxter, the general counsel to the New York Fed, described scrambling to avoid a catastrophe even after a credit rating downgrade threw the insurer into a liquidity crisis and prompted an $85 billion federal rescue in September 2008.
Baxter said that the failure of AIG, a $1 trillion company with operations in more than 140 countries and with 30 million U.S. clients, posed "overwhelming risk and catastrophic consequences."
When New York Fed officials learned in early November 2008 that a looming credit rating downgrade of AIG would enable banks with swap contracts to demand that the insurer post tens of billions of dollars in cash, they had too little time to hope to settle the contracts for more than "a modest discount," Baxter said. Even that failed, he said.
The GOP staff, however, said that New York Fed officials had rejected the option of simply keeping the swap contracts in place in an entity backed by the Fed on grounds they lacked statutory authority. "This excuse is problematic," the committee staffers wrote, "as the Federal Reserve guaranteed assets against losses in bailouts of other firms during the height of the financial crisis."
The decision to lay out the money, the staffers wrote, "means that $62.1 billion of taxpayer money may have been wasted."
Geithner has publicly defended the decision to pay face value for the swaps.
Republicans continued to turn up the heat on Tuesday. GOP Sen. Jim Bunning of Kentucky, a member of the Senate Banking Committee, disclosed that he's read a confidential Federal Reserve Board e-mail in which Fed staffers urged Bernanke not to rescue AIG, but to let it follow the investment bank Lehman Brothers into bankruptcy.
Issa fired off a letter on Tuesday to the committee's chairman, Democratic Rep. Edolphus Towns of New York, asking him to subpoena e-mails from the Federal Reserve.
Issa said a "whistleblower" had advised his staff that the documents "reveal troubling details" about Bernanke's involvement in the bailout decision.
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