The House Oversight Committee hearing on government assistance for AIG has begun. Timothy Geithner, the US Trasury Secretary and the chairman of the New York Federal Reserve Board at the time of the AIG bailout, is testifying on the first panel. His opening statement is contained in this document obtained by FDL News. In it, Geithner will say that the AIG bailout was crucial to saving the economy and the financial system:

The steps the government took to rescue AIG were motivated solely by what we believed to be in the best interests of the American people. We did not act because AIG asked for assistance. We did not act to protect the financial interests of individual institutions. We did not act to help foreign banks. 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.

The government responded to this crisis in a coordinated way. The Federal Reserve Bank of New York (FRBNY) did not act alone. It did not have the authority to do so. Every action it took was under the direction of the Board of Governors of the Federal Reserve and in
cooperation with the Department of the Treasury and the Executive Branch.

Almost a year and a half removed from that terrible week in September 2008, I believe that the government’s strategy regarding AIG was essential to our success in confronting the worst financial crisis in generations. Government support for AIG and our financial system more broadly will ultimately cost taxpayers far less than many feared. And importantly, if Congress adopts the President’s proposed Financial Responsibility Fee, American taxpayers will not have to pay one cent for the rescue of our financial system.

After explaining the history of AIG and the government’s decision to step in, Geithner finally gets around to the establishment of Maiden Lane III and the paying off of the counter-parties at par. He says that the government had few other options, and that the consequences of AIG defaulting on these payments would be catastrophic.

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. AIG’s financial position was deteriorating rapidly and the prospect of a downgrade was imminent.

Some have suggested that the FRBNY should have used its regulatory authority, or some other means, to effectively coerce AIG’s counterparties to accept concessions. This was not a viable option either. Once a company refuses to meet its full obligations to a customer, other customers will quickly find other places to do business. If we had sought to force counterparties to accept less than they were legally entitled to, market participants would have lost confidence in AIG and the ratings agencies would have downgraded AIG again. This could have led to the company’s collapse, threatened our efforts to rebuild confidence in the financial system, and meant a deeper recession, more financial turmoil, and a much higher cost for American taxpayers.

Clearly this is the cover story. Geithner also says that he had no role in the NY Fed preventing disclosure of the counter-party payment information, having recused himself from day-to-day operations after being nominated for Treasury Secretary on November 24, 2008.

You can read the testimony for yourself. I’ll be monitoring the hearings and see how Oversight Committee members react to Geithner’s defense.

UPDATE: Here’s a portion of Chairman Ed Towns’ testimony. You can watch live on C-SPAN 3, by the way, or at the Oversight Committee website.

In the AIG case, we can talk all we want about complicated business deals, but this all boils down to a simple concept – when average people were losing their homes and jobs, the same big banks that caused the problems got every dollar back, courtesy of the American taxpayer. And the Federal Reserve tried to keep important information secret.

Secrecy leads to distrust. And the American people now distrust what happened in these bailouts. Congress has the right to know how and why that happened and the American people have the right to know how and why that happened.

David Dayen

David Dayen