Geithner Slammed for Defending AIG Bailout

Updated at 6:38 p.m. EST

Democrats and Republicans alike pummeled Treasury Secretary Timothy Geithner on Wednesday over his role in the $180 billion bailout of insurance giant AIG Inc., venting public anger over Wall Street's return to prosperity while 10 percent of Americans are still jobless.

Geithner, one of the original architects of the government's 2008 response to the financial crisis as president of the Federal Reserve Bank of New York, defended the use of taxpayer money as necessary to head off "potentially catastrophic damage to the economy."

But members of the House Committee on Oversight and Government Reform hammered away at why regulators allowed American International Group to pass on billions of the bailout money to big Wall Street banks that were business partners.

"In effect, the taxpayers were propping up the hollow shells of AIG by stuffing it with money. And the rest of Wall Street came by and looted the corpse," committee chairman Edolphus Towns, D-N.Y., told Geithner.

Geithner clearly was getting no cover from committee Democrats on the day that President Barack Obama was to give a State of the Union address intended to assure Americans he shares their economic priorities.

Rep. Marcy Kaptur, D-Ohio, suggested Geithner was more beholden to banking interests than to taxpayers at the New York Fed and cut him off abruptly when he tried to deny it.

Kaptur later called Geithner's performance weak and said it showed that "he shouldn't have been appointed in the first place." She said in an interview that he should leave the administration "but removing him would be an empty change without eliminating the revolving door between Washington and Wall Street."

Both Geithner and Federal Reserve Chairman Ben Bernanke have recently found themselves on the defensive, both targets of political discontent and rising voter anger sweeping the nation.

Bernanke had to scramble for support for confirmation for a second term. And Geithner faced speculation over whether his influence was fading after Mr. Obama reset his economic priorities to go with a far more aggressive attack on Wall Street and large banks and began paying more attention to advice from former Fed Chairman Paul Volcker.

But if Geithner risked being hung out to dry by the administration, it was not obvious in his testimony, in which he tied to deflect repeated congressional criticism and vigorously defended his record.

"Deciding to support AIG was one of the most difficult choices I have ever been involved in, in over 20 years of public service. The steps that were taken were motivated solely by what we believed to be in the public interest," Geithner said.

He also repeated an insistence that he played no direct role in AIG deals with business partners or in withholding information about them from the public.

Geithner used the hearing to push for new regulations of Wall Street, CBS News correspondent Sharyl Attkisson reports.

"If you were outraged by AIG - and you should be - then you should be deeply committed to financial reform," Geithner said.

But, Attkisson notes the president has now embraced a much tougher plan for reform -- and now says banks should be restricted from making risky investments that benefit only the bankers and not their customers.

When Mr. Obama picked him for the Treasury post on November 24, 2008, "I withdrew from monetary policy decisions ... and day to day management of the New York Fed," Geithner testified. "I don't think there was a better alternative available."

AIG eventually received an aid package from the government of more than $180 billion. At issue is the part of this money to repay banks that were its business partners, known as counterparties, and alleged efforts to cover up details of the payments.

The committee subpoenaed 250,000 pages of documents from the Fed.

Lawmakers are concerned with revelations about efforts to keep details of the AIG deals secret. Officials from the Treasury Department and the New York Fed worked to keep the public from learning details about those deals and other AIG decisions.

Even today, the Federal Reserve refuses to turn over documents that would shed light on who made what decisions and why, reports Attkisson.

"I played no role in those decisions," Geithner said. "I will take complete responsibility for decisions I played a role in shaping," he said.

But lawmakers expressed skepticism.

"Many people, including people of this committee, have a hard time believing Secretary Geithner entered into an absolute cone of silence," California Rep. Darrell Issa, the committee's top Republican, said. Issa said he had "lost confidence" in Geithner.

Democrats and Republicans took turns lambasting the Treasury secretary.

"Either you made a bad decision there, or there was the attempt to cover up one of the biggest bailouts, backdoor bailouts, in history," Rep. John Mica, R-Fla., told him.

Recalling the early controversy over Geithner's failure to pay some personal income taxes, Mica said: "You gave lame excuses then, you are giving lame excuses now. Why shouldn't we ask for your resignation as secretary of the Treasury?"

"You have a right to your opinion," Geithner said.

Rep. Stephen Lynch, D-Mass., told Geithner: "It just stinks to the high heaven what happened here."

Lynch said later that Geithner's reputation "has been hurt greatly."

Bernanke also said Wednesday he was "not directly involved in negotiations" involving payments from AIG to its business partners including Goldman Sachs and other Wall Street firms. Those negotiations were handled primarily by the staff of the New York Fed, he said.

Bernanke made the comments in written responses to questions posed by Issa.

Although Bernanke and Geithner have taken the most heat, the government's bank rescue effort began under former President George W. Bush and Henry Paulson, his Treasury secretary.

Paulson, who followed Geithner at Wednesday's hearing, defended his own role. "An AIG failure would have been devastating to the financial system and the economy," he said. "AIG could not be effectively wound down."

Rep. Elijah Cummings, D-Md., asked Paulson if he didn't realize how angry people were at wealthy bankers and Wall Street barons who he said play golf together and are always "looking out for themselves" while the rest of the country suffers.

"I'm not a golfer but I sure know that's how people feel. Congressman, you've got it. People are very, very angry. And rightfully so ... They don't recognize that what was done wasn't done for the banks" but to save the nation's financial system and economy.