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Treasury chief Geithner on hot seat over AIG

Paulson, Bernanke also reportedly will be asked to testify


WASHINGTON—Intensifying political pressure concerning counterparty payments that American International Group Inc. made after its federal bailout has put U.S. Treasury Secretary Timothy Geithner on the defensive.

A hearing by the House Committee on Oversight and Government Reform set for Wednesday will focus on Mr. Geithner's role in AIG's September 2008 bailout, when he was head of the Federal Reserve Bank of New York, and seeks to explain “how and why taxpayer dollars were used for a backdoor bailout,” Rep. Edolphus Towns, D-N.Y., chairman of the panel, said in a statement last week.

Separately, controversial bonuses paid to AIG executives are back on the agenda of the House Financial Services Committee, Rep. Barney Frank, D-Mass., last week said of the panel he chairs.

Mr. Geithner has come under fire since early January reports that the New York Fed advised the New York-based insurer to limit its public financial disclosures. E-mails obtained by the government and disclosed by Rep. Darrell Issa, R-Calif., showed that the FRBNY instructed AIG to withhold information in a December 2008 regulatory filing about more than $62 billion it paid to counterparties.

The counterparty payments of 100 cents on the dollar were to Goldman Sachs Group Inc., Societe Generale S.A., Bank of America Corp. and others to liquidate credit default swaps an AIG unit had sold them, officials said.

Questions remain “why these companies received full compensation, when the best they could have hoped for in a bankruptcy proceeding was perhaps 30 or 40 cents on the dollar,” Rep. Towns said.

Mr. Geithner will be asked to testify about his role in AIG matters, including any advice to AIG about counterparty payments, Rep. Towns said. Last week, Rep. Towns subpoenaed FRBNY documents related to the matters, including e-mails and phone logs.

In a CNBC interview last week, Mr. Geithner defended the decision to pay the counterparty banks in full, saying the FRBNY was legally obligated to do so.

The Obama administration and the FRBNY have said Mr. Geithner was not aware of e-mails that FRBNY lawyers sent advising the insurer to limit public disclosures about the payments.

Aside from Mr. Geithner, the hearing will include Thomas Baxter, general counsel for the FRBNY; Elias Habayeb, former chief financial officer of AIG Financial Services Group; and Neil Barofsky, special inspector general for the Troubled Asset Relief Program, Rep. Towns said.

Meanwhile, in response to calls to widen the probe, Rep. Towns late last week invited former Treasury Secretary Henry Paulson and former FRBNY Chairman Stephen Friedman, now a member of Goldman Sachs' board, to testify.

“We're learning that the bailout of AIG was far more complex than we initially understood, and the hearing confirms that,” said Robert P. Hartwig, president of the New York-based Insurance Information Institute. “But this time, it is Mr. Geithner in the hot seat, as opposed to AIG.”

Several observers said the hearing is largely about the past and should not have any direct bearing on AIG's operations or the status of its federal rescue package.

However, “It does raise a lot of important issues about transparency,” said Bill Bergman, an analyst with Morningstar Inc. in Chicago. “But I think the bigger question for AIG is, "Who is calling the shots?'”

Meanwhile, Rep. Frank said he would reopen the AIG bonus issue.

“The roles of Treasury Secretary Tim Geithner, his predecessor Henry Paulson and Federal Reserve Board Chairman Ben Bernanke in approving controversial bonuses to AIG executives are back on the agenda,” Mr. Frank said in a statement.

The $165 million retention bonuses paid to employees of AIG Financial Products Corp. sparked a public outcry last March, with President Barack Obama instructing Mr. Geithner to explore legal avenues to get the bonus money returned. Former AIG CEO Edward M. Liddy called on some employees to voluntarily return the bonuses.

About $19 million was returned, Mr. Barofsky said in a recent report.

AIG declined to comment.