Geithner defends AIG bailout
Pressed by bailout watchdogs, Treasury secretary says Fed had no choice but to help insurer pay its business partners at top dollar to avoid market collapse.
WASHINGTON (CNNMoney.com) -- Treasury Secretary Tim Geithner said on Thursday that he had no choice but to pay top dollar to business partners of troubled insurer AIG to avert a deeper financial panic last year.
Geithner defended regulators' actions to prop up American International Group (AIG, Fortune 500) with $62.1 billion that was essentially funneled to 16 banks that were counterparties to AIG insurance contracts.
"I don't understand why this is so complicated," Geithner told the Congressional Oversight Panel at a hearing on Capitol Hill. "You either prevent default, because default would be cataclysmic - or you don't. If you selectively default on any, the thing will come crashing down."
Geithner and Federal Reserve Chairman Ben Bernanke have been criticized by Special Inspector General Neil Barofsky, who said regulators failed to use their clout to get concessions from companies that had AIG contracts.
Geithner, who was then president of the New York Fed, said he was worried at the time that an AIG default on any one contract would "accelerate and not mitigate the panic."
At stake were insurance contracts that AIG sold on assets that had plummeted in value and that required AIG to post collateral. The amount paid to the 16 banks represented the full-dollar amount of the underlying assets that the counterparties had insured through AIG.
The Fed opted to send $27 billion of government funds and $35 billion of collateral already posted by AIG to 16 banks, including Goldman Sachs (GS, Fortune 500), Merrill Lynch, UBS (UBS), Bank of America (BAC, Fortune 500), Wachovia (WB) two French banks and several others.
"There is no other way - in the context of that storm - to protect the economy from that failure," Geithner said.
In pressing Geithner, panel head Elizabeth Warren repeated reports that AIG had been negotiating smaller payments to its counterparties when the Fed stepped in and stopped those negotiations.
"They ended up with 100 cents-on-the-dollar government guarantees for which they had never paid," Warren said.
Geithner said that "nothing would have made me happier than to have a different set of choices."