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Fallout: The Financial Crisis

Geithner, Paulson defend AIG actions

Jeremy Hobson Jan 27, 2010
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Fallout: The Financial Crisis

Geithner, Paulson defend AIG actions

Jeremy Hobson Jan 27, 2010
HTML EMBED:
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TEXT OF STORY

Kai Ryssdal: You know, every now and then official Washington stops being so official. When people actually say exactly what’s on their mind. Those moments are obviously few and far between. But there was one today on Capitol Hill. Treasury Secretary Timothy Geithner was testifying about AIG. Why in the government didn’t want to say which banks the big insurance company was helping to bail out.

Geithner was getting some not entirely friendly questioning about that from Republican Congressman Darrell Issa.

TIMOTHY GEITHNER: Well, congressman, as you know, this question of disclosure was a subject of huge amount of controversy. And most people…

DARREL ISSA: You think?

GEITHNER: Yeah, that’s what my son says, and I agree with you…

Yeah, a lot of people do think, which is why Mr. Geithner and his predecessor, former Treasury Secretary Henry Paulson, were in the witness chair today. They were explaining what happened with AIG back in September of ’08. Marketplace’s Jeremy Hobson reports.


JEREMY HOBSON: Remember how tense things were when AIG was bailed out? Hugh Johnson of Johnson Illington Advisors does. He says on those scary days, everyone was asking, if AIG were allowed to fail…

HUGH JOHNSON: Will that hurt the confidence in the entire system, in other words, cause a contemporary run on all major financial institutions and really bring the financial system to a screeching halt.

In testimony today, former Treasury Secretary Henry Paulson, who was involved in the decision to bail out AIG, went even further.

HENRY PAULSON: We have after everything that was done, all the resources, we have 10 percent unemployment. I believe we easily would have had 25 percent unemployment.

But here’s the problem. After the government pumped $85 billion into AIG, the insurer took the money and paid its customers in full for their debt-insurance contracts. AIG’s customers included big investment banks like Goldman Sachs.

Massachusetts Congressman Stephen Lynch grilled Secretary Geithner today on why the government didn’t force banks to take some loss on their AIG contracts.

STEPHEN LYNCH: We were changing the rules day by day, and we had the banks at a position where we could have exercised a lot of leverage, and you chose not to do it. You chose not to do it.

GEITHNER: Right, I disagree with you.

LYNCH: And it doesn’t mean we have to pay them 100 cents on the dollar, or we let them fail. There are increments here.

Lawmakers also want to know why the government didn’t say which banks got paid by AIG when it was bailed out. Here was Geithner’s answer to that:

GEITHNER: We would not want to disclose information that would be bad for the taxpayer, make it harder for the taxpayer to recoup our investments.

In other words, if the world found out that Goldman was at risk of collapse if it didn’t get paid, Goldman could have collapsed, making matters worse across the economy. Bottom line, says Hugh Johnson, even the smartest guys in the room were scared and didn’t want to play Russian Roulette with financial institutions.

JOHNSON: You know you never really test these things, you ask the questions but you never get the answers.

That was certainly the case on Capitol Hill today. But members of Congress don’t seem likely to stop asking as long as populist rage against Wall Street continues to simmer.

In New York, I’m Jeremy Hobson for Marketplace.

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