Lawmakers Grill Geithner, Bernanke On AIG Rescue

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner went to Capitol Hill on Tuesday hoping to spend time with lawmakers discussing new regulatory tools to deal with failing companies as large and complex as AIG. Instead, they spent most of their time defending their roles in the rescue of the insurance giant.

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Leaders of the country's economic team want more power to avoid financial disruptions. The proposal comes from Ben Bernanke of the Federal Reserve and Timothy Geithner of the Treasury Department. They want to expand the government's authority to take over a financial firm in trouble. But when they offered that plan to Congress, the discussion itself was taken over. Lawmakers asked about Bernanke's and Geithner's roles in bailing out the insurance firm AIG.

NPR's John Ydstie reports.

JOHN YDSTIE: Members of the House Financial Services Committee continued to fume about the handling of the AIG rescue and the $175 billion the government has committed to the effort so far.

In his opening statement, Treasury Secretary Geithner clearly tried to head off more criticism of the bonuses paid this month to AIG employees. After learning of the bonuses, Geithner said he called AIG CEO Edward Liddy and asked him to renegotiate the payments.

Secretary TIMOTHY GEITHNER (U.S. Treasury Department): He explained that the contracts for the retention payments were legally binding and pointing out the risk that by breaching the contracts some employees might have a claim under Connecticut law to double payment of the contracted amounts.

YDSTIE: The revelation that the government might be forced by a court to pay double the bonuses if it withheld them may have helped subdue further examination of that issue, but Republican Don Manzullo of Illinois mustered a great deal of resentment on another issue.

He accused Chairman Bernanke of protecting people with AIG-insured retirement policies while most Americans saw their 401(k)s plummet after the rescue.

Representative DON MANZULLO (Republican, Illinois): The American people paid $40 billion so people with retirement plans that had insurance with AIG did not have to lose. Isn't that correct?

Mr. BEN BERNANKE (Federal Reserve Chairman): They lent $40 billion to avoid a catastrophic collapse of the financial system.

Rep. MANZULLO: Can you give me a yes or no? Anybody there, please.

Mr. BERNANKE: You said it was the purpose, that was the purpose…

Rep. MANZULLO: I've got 14 percent unemployment back home. People are desperate. Half the people have lost half their retirement, and not one of you three can give me a yes on that answer.

YDSTIE: Bernanke said most Americans would have lost much more of their 401(k)s if AIG had been allowed to collapse.

The committee's ranking Republican, Spencer Bachus of Alabama, was also interested in those who had been directly aided by the government money pumped into AIG, particularly the financial institutions like Goldman Sachs and Deutsche Bank that had bought credit default swaps from AIG and were paid billions.

Representative SPENCER BACHUS (Republican, Alabama): Was there any discussion over a haircut - 95 percent, taking 95 percent or 90 percent as full payment?

Secretary GEITHNER: We explored at that time every possible means to reduce the drain on their resources…

Rep. BACHUS: Well…

Secretary GEITHNER: …including, including what you refer to. But again, because we have no legal mechanism in place for dealing with this like we deal with a bank, we did not have the ability to selectively impose losses on their counterparts.

Rep. BACHUS: You were 80 percent owners.

(Soundbite of gavel pounding)

Representative BARNEY FRANK (Democrat, Massachusetts): No, I'm sorry. The gentleman is now…

YDSTIE: Both Bernanke and Geithner argued the government needs the power to step in and take over financial institutions whose collapse threatens the financial system in the same way the FDIC takes over troubled banks and disposes of their assets. That would help to avoid the huge potential cost for rescues like AIG's.

Geithner is likely to provide more detail on that idea when he testifies again tomorrow on the administration's outline for financial reform. John Ydstie, NPR News, Washington.

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