Treasury Secretary testified before the Senate Banking Committee on the TARP program. A number of Senators pressed Tim Geithner on full payment to AIG counter parties. Over $70 billion in taxpayer money went to settle half of AIG's derivative risk. The other half remains.
While being pressed by Senator Mark Warner, Tim brought in motherhood and apple pie as a defense. It went like this (at the 2:03 mark):
Senator Warner: I am very, very troubled by your comments on AIG and our obligation to maintain 100 cents on the dollar to counter parties....
Secretary Geithner: ...Everything we do on AIG going forward, we are going to try to balance what we think is the best way to reduce risk to the taxpayer over time, at the least potential damage to the financial system as a whole. It is an incredibly difficult balance. And uh, it is very hard to know if we get that balance right, but we've kind of had a good experience with what happens to people when we get that balance wrong....
Senator Warner: The taxpayer should be expected to continue to honor all of the AIG obligations at 100 cents on the dollar for as long as we're in AIG?
Secretary Geithner: I think Senator I would say it differently. What my obligation is, again, is to try to manage through this incredibly difficult problem in a the way that minimizes losses to the taxpayer and minimizes broader risk of damage to rest of the financial system, because as we saw last year the effects of getting that judgment wrong are deeply traumatic to people who were careful and responsible... My obligation is not to protect the counter parties at AIG. I would not give a penny to the counter parties at AIG. What I care about is trying to make sure that we reduce risk of loss to the taxpayer, and we reduce the risk of avoidable damage to the fabric of confidence in our financial system because of the effect it has on pension values (big smile), again on business viability, on the cost of credit, on the ability to put your kids through college, on the viability of business on Main Street, on the level of unemployment. I know that connection seems remote, is hard to appreciate, cannot be certain we get that balance right, but look what happened when reasonably careful people got that balance wrong.
Not that's a non-answer! Maybe next time Tim can get through his Rahm Emanuel supplied lines without that half sneer/snicker.
Treasury gave billions to AIG, which they in turn gave to counter parties to reduce a portion of its derivative risk. Many of those counter parties had outstanding first quarter investment returns. It looks part of a plan to increase confidence in the fabric of our financial system. Tim's words, not mine.
