[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]

                       THE FEDERAL BAILOUT OF AIG



                               before the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES


                             SECOND SESSION


                            JANUARY 27, 2010


                           Serial No. 111-107


Printed for the use of the Committee on Oversight and Government Reform

  Available via the World Wide Web: http://www.gpoaccess.gov/congress/

                       THE FEDERAL BAILOUT OF AIG

                       THE FEDERAL BAILOUT OF AIG



                               before the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES


                             SECOND SESSION


                            JANUARY 27, 2010


                           Serial No. 111-107


Printed for the use of the Committee on Oversight and Government Reform

  Available via the World Wide Web: http://www.gpoaccess.gov/congress/

63-136                    WASHINGTON : 2011
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                   EDOLPHUS TOWNS, New York, Chairman
PAUL E. KANJORSKI, Pennsylvania      DARRELL E. ISSA, California
CAROLYN B. MALONEY, New York         DAN BURTON, Indiana
ELIJAH E. CUMMINGS, Maryland         JOHN L. MICA, Florida
DENNIS J. KUCINICH, Ohio             MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts       JOHN J. DUNCAN, Jr., Tennessee
WM. LACY CLAY, Missouri              MICHAEL R. TURNER, Ohio
DIANE E. WATSON, California          LYNN A. WESTMORELAND, Georgia
STEPHEN F. LYNCH, Massachusetts      PATRICK T. McHENRY, North Carolina
JIM COOPER, Tennessee                BRIAN P. BILBRAY, California
GERALD E. CONNOLLY, Virginia         JIM JORDAN, Ohio
MIKE QUIGLEY, Illinois               JEFF FLAKE, Arizona
MARCY KAPTUR, Ohio                   JEFF FORTENBERRY, Nebraska
    Columbia                         AARON SCHOCK, Illinois
DANNY K. DAVIS, Illinois             ANH ``JOSEPH'' CAO, Louisiana
PAUL W. HODES, New Hampshire
JUDY CHU, California

                      Ron Stroman, Staff Director
                Michael McCarthy, Deputy Staff Director
                      Carla Hultberg, Chief Clerk
                  Larry Brady, Minority Staff Director

                            C O N T E N T S

Hearing held on January 27, 2010.................................     1
Statement of:
    Barofsky, Neil M., Special Inspector General for the Troubled 
      Asset Relief Program; Thomas Baxter, general counsel and 
      executive vice president, Federal Reserve Bank of New York; 
      Elias Habayeb, former senior vice president and chief 
      financial officer, Financial Services Division, American 
      International Group, Inc.; Stephen Friedman, former 
      chairman, Federal Reserve Bank of New York.................   159
        Barofsky, Neil M.........................................   159
        Baxter, Thomas...........................................   176
        Friedman, Stephen........................................   212
        Habayeb, Elias...........................................   199
    Geithner, Timothy F., Secretary, U.S. Department of the 
      Treasury...................................................    18
    Paulson, Henry M., Jr., former Secretary, U.S. Department of 
      the Treasury...............................................   133
Letters, statements, etc., submitted for the record by:
    Barofsky, Neil M., Special Inspector General for the Troubled 
      Asset Relief Program, prepared statement of................   162
    Baxter, Thomas, general counsel and executive vice president, 
      Federal Reserve Bank of New York, prepared statement of....   178
    Connolly, Hon. Gerald E., a Representative in Congress from 
      the State of Virginia, prepared statement of...............   250
    Friedman, Stephen, former chairman, Federal Reserve Bank of 
      New York, prepared statement of............................   214
    Geithner, Timothy F., Secretary, U.S. Department of the 
      Treasury, prepared statement of............................    22
    Habayeb, Elias, former senior vice president and chief 
      financial officer, Financial Services Division, American 
      International Group, Inc., prepared statement of...........   201
    Issa, Hon. Darrell E., a Representative in Congress from the 
      State of California:
        Information concerning derivative transactions...........    10
        Prepared statement of....................................    16
    Kaptur, Hon. Marcy, a Representative in Congress from the 
      State of Ohio:
        Memo dated October 2, 2008...............................   109
        Talk sheet...............................................    58
    Maloney, Hon. Carolyn B., a Representative in Congress from 
      the State of New York, letter dated March 4, 2009..........   239
    Paulson, Henry M., Jr., former Secretary, U.S. Department of 
      the Treasury, prepared statement of........................   136
    Towns, Chairman Edolphus, a Representative in Congress from 
      the State of New York, prepared statement of...............     4

                       THE FEDERAL BAILOUT OF AIG


                      WEDNESDAY, JANUARY 27, 2010

                          House of Representatives,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:10 a.m., in 
room 2154, Rayburn House Office Building, Hon. Edolphus Towns 
(chairman of the committee) presiding.
    Present: Representatives Towns, Kanjorski, Maloney, 
Cummings, Kucinich, Tierney, Clay, Watson, Lynch, Cooper, 
Connolly, Quigley, Kaptur, Norton, Davis, Van Hollen, Cuellar, 
Welch, Foster, Driehaus, Chu, Issa, Burton, Mica, Duncan, 
Turner, Westmoreland, McHenry, Bilbray, Jordan, Flake, 
Fortenberry, Chaffetz, Schock, Luetkemeyer, and Cao.
    Also present: Representatives Blunt, Bachus, and Stearns.
    Staff present: John Arlington, chief counsel--
investigations; Beverly Britton Fraser, counsel; Lisa Cody, 
investigator; Brian Eiler and Neema Guliani, investigative 
counsels; Adam Hodge, deputy press secretary; Carla Hultberg, 
chief clerk; Marc Johnson and Ophelia Rivas, assistant clerks; 
Phyllis Love, Ryshelle McCadney, Christopher Sanders, and Alex 
Wolf, professional staff members; Mike McCarthy, deputy staff 
director; Amy Miller and Gerri Willis, special assistants; Leah 
Perry and Steven Rangel, senior counsels; Jason Powell, counsel 
and special policy advisor; Jenny Rosenberg, director of 
communications; Joanne Sanders and Christopher Staszak, senior 
investigative counsels; Leneal Scott, IT specialist; Shrita 
Sterlin, deputy director of communications; Ron Stroman, staff 
director; Lawrence Brady, minority staff director; John 
Cuaderes, minority deputy staff director; Rob Borden, minority 
general counsel; Jennifer Safavian, minority chief counsel for 
oversight and investigations; Frederick Hill, minority director 
of communications; Adam Fromm, minority chief clerk and Member 
liaison; Kurt Bardella, minority press secretary; Seamus Kraft 
and Benjamin Cole, minority deputy press secretaries; Tom 
Alexander and Christopher Hixon, minority senior counsels; 
Daniel Epstein, Chapin Fay, Hudson Hollister, and Mitchell 
Kominsky, minority counsels; Brien Beattie, Molly Boyl, Alex 
Cooper, Meredith Liberty, and Mark Marin, minority professional 
staff members; Sharon Casey, minority executive assistant; 
Stephanie Franco, minority press secretary and communications 
liaison; Ashley Swope and Mike Whatley, minority staff 
    Chairman Towns. The committee will come to order.
    Good morning.
    On September 16, 2008, the Wall Street giant AIG faced 
immediate bankruptcy. AIG was saved from collapse when the 
American people came to the rescue with an $85 billion bailout. 
Less than 2 months later, the American taxpayer was again 
forced to pay the bill when the Federal Reserve directed AIG to 
hand out billions of dollars to counterparties that included 
the biggest names on Wall Street.
    In effect, the taxpayers were propping up the hollow shell 
of AIG by stuffing it with money, and the rest of Wall Street 
came by and looted the corpse.
    The circumstances surrounding the payments to the 
counterparties has created an air of suspicion and distrust 
among the American people, starting with the New York Fed's 
initial refusal to name the counterparties.
    The New York Fed argued that disclosing these 
counterparties would somehow injure AIG. In fact, when the 
information was finally released under pressure from Congress, 
nothing happened. It had absolutely no effect on AIG's business 
or financial condition.
    But it did have an effect on the credibility of the Federal 
Reserve and it called into question the Fed's penchant for 
secrecy. We need to change the culture on Wall Street and the 
culture among the regulators, from secrecy to transparency, 
recognizing that only truly confidential competitive or 
consumer information should be protected.
    As we sit here a year and a half later, after AIG handed 
out billions in taxpayer dollars, because of this secrecy, we 
still don't know why or how the decision to rescue AIG was 
made, or who made the decision to offer AIG's trading partners 
100 cents on the dollar in the so-called counterparty payments.
    Every day in the business world, when a company is having 
financial problems, its creditors have to take less money than 
they are owed. Otherwise, they risk not getting any money at 
    They call this a ``haircut.'' In the case of AIG, nobody 
got a haircut. Instead, they were given a piggy bank full of 
taxpayer dollars and said help yourself. Let me just say 
plainly that I think just about every American would say the 
government should have forced AIG's counterparties to take less 
    Evidently, major decisions were made by a combination of 
the Federal Reserve, the Federal Reserve Bank of New York, and 
the Bush Treasury Department. Today, we will hear from 
witnesses who were involved in making these decisions, and we 
hope they can shed light on a murky set of facts.
    Under subpoena, the committee obtained more than 250,000 
pages of documents from the New York Fed detailing its handling 
of the AIG counterparties. Particularly disturbing is the fact 
that these emails indicate that AIG proposed to disclose to the 
SEC and the public the names of the counterparties and the 
payments. But it was the New York Fed that directed AIG to 
withhold this information. As one New York Fed staffer put it, 
``any public disclosure by AIG is still subject to Fed 
    At least two things are clear here: The entire financial 
regulatory system was broken, and there shouldn't be any more 
bailouts. The lack of transparency we have seen in the double 
bailout of AIG leads to distrust, which leads to anger.
    The question that looms over all of this: How do we prevent 
a repeat of this financial crisis in the future? Unless the 
Congress adopts genuine financial services reform, it will be 
only a matter of time before we see another AIG, another Bear 
Stearns, another Lehman Brothers, and the next big bank will be 
``too big to fail'' and the taxpayers will wind up footing the 
bill again and again and again.
    I ask my Republican colleagues on this committee to join 
with me in fixing the system. Blame is about yesterday. Fixing 
the system is about today and the future.
    In the AIG case, we can talk all we want to 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 a 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.
    I hope that today we can get answers to these and other 
important questions.
    [The prepared statement of Chairman Edolphus Towns 






    Chairman Towns. I now yield to our ranking member, the 
gentleman from California, Congressman Darrell Issa for his 
opening statement.
    Mr. Issa. Thank you, Mr. Chairman. You have our promise 
that this has been and will continue to be a bipartisan 
oversight of these and all the issues related to the Fed's 
current and future authority.
    Mr. Chairman, I would like to ask unanimous consent, 
pursuant to our rules, that Spencer Bachus, the ranking member 
on Financial Services Committee; Kevin Brady of Texas, the 
ranking House Republican on the Joint Economic Committee; Roy 
Blunt, the former Whip; Ron Paul, whose credentials on this are 
well understood; and Cliff Stearns of Florida be allowed to sit 
on the dais and, should there be time, allowed to ask questions 
pursuant to the rules.
    Chairman Towns. Without objection.
    Mr. Issa. Additionally, I would ask, at this time, to 
submit for the record Schedule A, which is in fact the 
shortfall agreements between Maiden Lane III and AIG Financial 
Products, since they will be referred to in questioning, and we 
want to make sure they are officially in the record.
    Chairman Towns. Reserving the right to object.
    Mr. Issa. OK.
    [The information referred to follows:]

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    Mr. Issa. Additionally, Mr. Chairman, I would ask unanimous 
consent that the eight letters previously sent to Secretary 
Geithner and, as of today, not responded to also be placed in 
the record at this time, although they will not be reviewed 
further during this hearing.
    Chairman Towns. Reserving the right to object.
    Mr. Issa. Thank you, Mr. Chairman.
    Thank you, Mr. Chairman, for all of this and more. Working 
together with you on the subpoena documents has caused both the 
majority and minority to glean considerable new information.
    In recent weeks, this committee, receiving these documents 
have caused us to better understand the New York Fed pressured 
AIG to abort negotiations designed to obtain a haircut, as it 
was called, from its counterparties and keep the details of the 
counterparties' payments from appearing on the firm's forms at 
the SEC.
    Today, one of the questions we will ask is should the 
American people be kept from knowing until 2018 the details of 
who were the ultimate beneficiaries of this bailout.
    As I have said before, I consider this a back door bailout. 
The people giving us testimony today will tell us that they 
felt that this was essential and necessary. Mr. Chairman, as 
you can recall, AIG's founder, Hank Greenberg, has previously 
testified, along with AIG CEO Edward Liddy. And in that 
testimony Hank Greenberg made it very clear that he believed 
that: one, hedging should have occurred sooner; and, two, 
bankruptcy would have been a cleaner way to resolve a company 
in which he is the largest stockholder.
    I am proud to say, after that hearing, AIG has re-engaged 
their founder to help them maximize the value of a company that 
is currently 80 percent owned by the American people.
    Not to say that there is a lot of good news at AIG. Mr. 
Chairman, it is clear that the money paid and it being kept 
secret may ultimately cause the American people never to be 
repaid these dollars.
    Can you hear me OK now? You can't? OK. Now. OK, I will 
focus on this mic this time. Usually the problem is I am too 
well heard, right, Mr. Chairman?
    Chairman Towns. Generally.
    Mr. Issa. Today we will have an opportunity to ask 
questions and the American people will have the right and I 
believe will receive straightforward answers.
    So far, Mr. Chairman, this is what we know. We know that 
some of today's witnesses played a central role in the decision 
to bail out AIG, rather than allow the normal bankruptcy 
procedures to run their course. We know that one of today's 
witnesses made the decision to pay AIG counterparties at 100 
cents on the dollar. We know that one of today's witnesses was 
the primary architect of the AIG Trust Agreement, whereby the 
taxpayers' investment in AIG is managed not in the interest of 
the U.S. taxpayers, but of the U.S. Treasury Department. That 
was from previous testimony and we rely on that to say perhaps 
that is not the right answer.
    We know that the New York Fed sought to cover the 
counterparty payments made possible by the taxpayers' money. We 
now better understand that the New York Fed transferred their 
earlier responsibility to the American people after TARP was 
passed. We know that the New York Fed succeeded in getting the 
SEC to continue the cover-up until 2018, 10 years from the date 
the bailout began. And we know that the full amount paid to 
AIG's counterparties will likely never be repaid to the 
American people.
    Some facts, Mr. Chairman, remain unknown or uncertain. 
Secretary Geithner has claimed publicly that he recused himself 
from the day-to-day management of the New York Fed when the 
cover-up occurred. In fact, he has asserted complete ignorance 
of the Fed's efforts to cover up the bailout details. Many 
people, including members of this committee, have a hard time 
believing that Secretary Geithner entered into an absolute cone 
of silence--for those of us old enough to remember what that 
was--on the day his nomination was announced. Where was 
Secretary Geithner for the months and months that back door 
bailouts were being questioned in the media? Did he ever wonder 
why his decision to pay AIG's counterparties was kept secret 
for so long?
    These are the questions the American people deserve.
    Mr. Chairman, I would ask unanimous consent the remainder 
of my opening statement be placed in the record at this time.
    Chairman Towns. Without objection, so ordered.
    Mr. Issa. Thank you, Mr. Chairman. I yield back.
    [The prepared statement of Hon. Darrell E. Issa follows:]

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    Chairman Towns. I thank the gentleman from California.
    At this time we would like to turn to our first witness, 
Treasury Secretary Geithner.
    It is committee policy that all witnesses are sworn in, so, 
Mr. Secretary, if you would stand and raise your right hand.
    [Witness sworn.]
    Chairman Towns. Let the record reflect that he answered in 
the affirmative.
    You may be seated.

                          THE TREASURY

    Secretary Geithner. Chairman Towns, Ranking Member Issa, 
members of the committee, thank you for the opportunity to 
testify before you today. I welcome the committee's attention 
to this issue, and we will continue to work closely with this 
committee, with all other oversight bodies----
    Chairman Towns. Mr. Secretary, pull the mic just a little 
closer. We are having a little trouble.
    Secretary Geithner. I am almost eating it.
    Chairman Towns. I know.
    Secretary Geithner. How does that sound?
    Chairman Towns. Shows you how our sound system is not too 
good around here. We keep making budget cuts.
    Secretary Geithner. I don't think I can make it any closer.
    I want to make sure that the American people have a 
comprehensive view of the actions we took to end this financial 
    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. We did not act 
because AIG asked for help. We did not act to protect 
individual institutions. We acted because the consequences of 
AIG failing would have been catastrophic for our economy and 
for American families and businesses.
    More than a year removed from that terrible week of 
September 2008, I believe that the Government's strategy--and 
it was the Government's strategy--was the best of the available 
options and will ultimately cost the taxpayer far less than 
many feared and far less than many alternatives many people 
suggest today would have been better. And, importantly, if you 
join with the President in adopting his proposed financial 
responsibility fee, American taxpayers will not have to pay one 
cent for the actions we took in AIG or the actions we took with 
the authority Congress gave the administration to stabilize 
this financial crisis.
    AIG's problems became acute just a few days before Lehman 
declared bankruptcy. At that time, our financial system and our 
economy stood at the brink of collapse. The banks and financial 
institutions that Americans rely on to protect their savings, 
to help finance their children's education, to help pay their 
bills were risks which few Americans had ever experienced. The 
banks and the financial markets that businesses rely on to meet 
payroll, to build inventory, to fund new investments, to create 
new jobs were threatened like at no time since the Great 
Depression. Across the country, across the United States of 
America, people were rapidly losing confidence in our financial 
system and in the Government's ability to safeguard their 
economic security.
    In the midst of this storm, AIG posed a much greater threat 
than Lehman. AIG was much larger; it was spread across the 
globe; and its failure would have been far worse, hitting 
Americans in ways Lehman could not. AIG was one of the largest 
life and health insurance companies in the country, one of the 
largest property and casualty insurers, providing insurance to 
180,000 small businesses and other corporate entities which 
together employed about 100 million people. AIG had sold 
products to protect local and city governments, pension funds, 
and thousands of public and private companies through 
guaranteed investment contracts and protection for 401-Ks. And, 
as problematic, AIG had engaged in a broad range of financial 
activities that strayed well beyond traditional insurance 
    Using a credit rating based on the strength and 
profitability of its insurance companies, it had become one of 
the largest providers of complicated financial products in the 
world. It made hundreds of billions of dollars of financial 
commitments without the resources to back up those commitments. 
AIG should have never been allowed to take those risks, but it 
was. Its insurance regulators in 20 different States, their 
regulators in other countries responsible for overseeing their 
international activities, and its holding company supervisor, 
the Office of Thrift Supervision, did not act to constrain the 
risks AIG was taking.
    Important to recall that the Federal Reserve was given no 
responsibility and no authority to contain risks that AIG was 
taking. No one acted to constrain risks taken by AIG, and none 
of those regulators, in the moment of crisis, had any ability 
to respond to its failure.
    The Government of the United States did not have the 
ability to seize AIG and wind it down in an orderly way, as the 
FDIC can and does for banks. Neither the bankruptcy code nor 
insolvency procedures for insurance companies could have 
handled the job. And there was no way to draw a line around AIG 
and prevent its failure from wreaking havoc across the system.
    The Federal Reserve was at the center of response to the 
crisis because it was the only fire station operating. The 
Federal Reserve faced a terrible choice: to support AIG, 
putting billions of dollars of taxpayer resources at risk, or 
to let AIG fail and accept potentially catastrophic damage to 
the economy. We were not willing to accept such a catastrophe.
    So just 4 days after the Federal Reserve was drawn into 
that crisis, the AIG crisis, we extended AIG a line of credit 
secured by its insurance businesses. In return, the taxpayer 
took about an 80 percent stake in the company and began the 
process of restructuring management and the board and the firm 
itself. That initial action helped stem the bleeding for a 
time, but given the massive losses AIG faced, and given the 
force of the storm moving across the global financial system, 
it was not enough, and we had to work very quickly almost from 
the beginning to design and implement a broader, more permanent 
    AIG needed capital, not just a line of credit, and AIG's 
vulnerability to future losses, to the bleeding of cash had to 
be reduced.
    On November 10th, the Federal Reserve and the Department of 
Treasury jointly announced a series of steps designed to 
stabilize the company. The Treasury invested $40 billion of 
preferred capital under the authority Congress provided the 
executive branch under the TARP, and the Federal Reserve helped 
establish and fund two entities, called Maiden Lane II and III, 
to purchase a range of assets from the company that were 
threatening AIG's financial solvency. Maiden Lane III, in 
particular, has been the subject, appropriately, of a range of 
questions about how we treated firms that had bought these 
insurance contracts from AIG, and in this effort--and I want to 
make this very clear--in this effort, our objective was, as 
always, to get what was the best deal for the American 
taxpayer. And we faced a number of options.
    If we had let AIG default on the contracts, AIG would have 
gone into bankruptcy, triggering all the disastrous economic 
consequences we had feared since September that led the 
Government to act initially. If we had continued to lend AIG 
money to meet these obligations, its growing debt would have 
led to a credit rating downgrade, bringing down the firm itself 
and putting more taxpayer dollars at risk. If we had tried to 
force counterparties to accept less than they were legally 
entitled to, market participants would have lost confidence in 
AIG, leading to the company's collapse. The counterparties 
could have refused, they could have kept the billions in 
collateral they had already taken; they could have kept the 
billions in securities they already had; and they could have 
sued AIG for breach of contract.
    We did not have the luxury of time. We could not engage in 
protracted negotiations. AIG's financial position was 
deteriorating rapidly day by day. The prospect of failure was 
imminent. So we restructured those contracts to stop the 
bleeding and potentially recover some value for the taxpayer in 
the future.
    Now, although the Government still faces the risk of 
substantial losses in its overall exposure to AIG, we expect 
that this particular transaction, the very one that is the 
heart of so much controversy, will be paid off in full with 
interest, generating some profit for the American taxpayer.
    Now, on November 24th, after President Obama announced his 
intention to nominate me for Secretary of the Treasury. And 
after broad consultation with the chairman of the Federal 
Reserve and others, I decided to stay on as president of the 
New York Fed on an interim basis, but I withdrew from monetary 
policy decisions, policies involving individual financial 
institutions, and day-to-day management of the New York Fed. I 
had no role before or after November 24th in making decisions 
regarding what to disclose about the specific financial terms 
of Maiden Lane II and III and payments to AIG counterparties.
    Mr. Chairman, the broad strategy that the Government 
adopted to contain this financial crisis has been remarkably 
effective at stemming the crisis, breaking the momentum of the 
crisis, and repairing the damage, and this has been achieved at 
much lower cost in taxpayer resources than many people 
anticipated. Confidence in the basic stability of the American 
financial system is much stronger today. Borrowing costs for 
American businesses and consumers, for households, for 
municipal and State governments have fallen dramatically. The 
economy is now growing. The support we provided to AIG in the 
context of the broad strategy to put out this financial fire 
was essential to achieving this early beginning of healing and 
    Banks have already repaid two-thirds of the TARP 
investments that my predecessor appropriately made. The only 
support this administration has provided to banks since I took 
office--to banks--was $7 billion to regional small community 
banks. More than 75 percent of the emergency Government 
guarantees that I inherited when I took office have now been 
shut down and closed at a profit to taxpayers. Over the last 
year, the expected cost of stabilizing the financial system has 
fallen by over $400 billion. That is real resources that we can 
use to meet the many other challenges we face as a country. And 
if Congress joins with us in adopting the President's proposal 
for a financial responsibility fee, the American taxpayer will 
recoup every penny of potential losses under the TARP.
    Now, this economy is still in crisis, but because of the 
Government's actions the American financial system is now in a 
position where it can provide the credit necessary for economic 
growth, and that is essential to lay the foundation for job 
growth and long-term economic prosperity.
    Now, let me close by saying this. If you are outraged by 
AIG--and you should be--if you are outraged by what happened 
with AIG, then you should be deeply committed to financial 
reform. The United States of America should never have let 
institutions like AIG take on a level of risk that could 
threaten the stability of the financial system. And the 
Government of the United States should never have been in the 
position of going into a crisis of this severity without the 
basic tools able to contain the damage and protect the 
    So I hope you will join us in working to put in place a 
strong package of financial reforms that will protect 
consumers, protect investors, protect the taxpayer, and protect 
our economy from excessive risk taking by financial 
    Mr. Chairman, one final thought. The public servants 
involved in making these decisions acted solely in the public 
interest, acted solely in the interest of the American 
taxpayer. They are dedicated Americans who bring to government 
service enormous experience and the highest integrity. I would 
never, and they would never, be part of any decision, any 
public decision intended for private benefit and not the public 
    The decisions we made together regarding AIG were 
enormously consequential; they were terribly difficult; they 
were the subject of extraordinary controversy within each of 
the institutions responsible. And for that reason they were 
subject to enormous care and deliberation. But I believe a fair 
reading of history, a careful fair reading of history of all 
the judgments we made, will demonstrate that the actions we 
took--and I was there--were essential to preventing broader 
catastrophe, and the solutions we took reduced the ultimate 
cost of the American taxpayer and the American economy is much 
stronger today as a result.
    Thank you very much.
    [The prepared statement of Secretary Geithner follows:]

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    Chairman Towns. Thank you very much, Mr. Secretary.
    Let me begin by asking a couple of questions. Were you 
involved in any discussions with AIG, or your staff involved, 
where you discussed what AIG should or should not disclose to 
the public?
    Secretary Geithner. Mr. Chairman, as I said, I had no role 
in making those decisions. But as the record shows, and the 
record before the committee shows, a large number of people at 
the Federal Reserve Bank of New York and the Federal Reserve 
Board in Washington played a very active role in thinking 
through those difficult choices.
    Chairman Towns. But I am not sure I got an answer there.
    Secretary Geithner. Let me say again. I personally played 
no role before the 24th or after in making those decisions. But 
you asked whether any employees of the New York Fed did. Of 
course they did.
    Chairman Towns. When you were the president of the Federal 
Reserve Bank of New York, when did you recuse yourself from 
matters involving specific companies and why did you recuse 
    Secretary Geithner. On November 24th, the President 
announced his intention to nominate me as Secretary of the 
Treasury. That forced me to make a set of decisions about what 
was appropriate for me to do, given the unique circumstance at 
that time.
    And after consulting with the chairman of the Federal 
Reserve, with the chairman of my board, with my general 
counsel, and with a range of other officials, collectively we 
decided that it was in the best interest of the Fed and the 
incoming administration for me to remove myself from day-to-day 
involvement in the Fed's policy issues, to leave that 
responsibility to my colleagues at the New York Fed, led by the 
executive, the first vice president of the New York Fed, but 
not to step down as president.
    And we made that decision because we wanted to make sure we 
were protecting the independence of the Fed and because I was 
going to be spending, by necessity, a huge part of my time in 
helping shape the President's economic agenda, and I was not 
going to be able to give the care and effort needed to carry on 
running the Fed on a day-to-day basis. Our judgment was that 
was the best decision at the time. I am confident of that in 
retrospect. It was unique. It was unique, but I don't think 
there was a better alternative available.
    Chairman Towns. Secretary Geithner, I don't think AIG's 
counterparties should have been paid 100 cents on the dollar, 
because in this email we have here--it is on the screen as 
well--you had some interest in how much the counterparties were 
owed. Please tell the committee what impact the counterparties' 
exposure had on your decision to pay 100 cents on the dollar.
    Secretary Geithner. Mr. Chairman, that played no role in 
our decision. As I said in my opening statement and as I have 
testified before, we had to make a difficult choice about what 
was going to prevent the failure of the firm at least cost to 
the taxpayer. If we had broken those contracts, if AIG had not 
paid them in full, if we had threatened default, if we had 
imposed haircuts, if we had selectively imposed haircuts, that 
would have brought about a downgrade in its rating, the firm 
would not have been able to operate, and it would have 
collapsed. It was because of those choices we took the path we 
did, to restructure the contracts and leave the taxpayer with 
some of the potential upside in those securities.
    Now, judging what is systemic and why a failure of AIG 
might matter for the system as a whole is a very difficult 
judgment to make; there is no black and white choice in that 
context. But our judgment was, as I said in my testimony, that 
AIG's collapse would have dramatically magnified all the 
effects you saw in the immediate aftermath of Lehman's failure, 
and in some ways they would have been more consequential 
because they would have spread to a set of insurance 
businesses, and that would have been much worse for the 
country. So we were guided by a simple but terrible choice: how 
best to prevent default at least cost to the taxpayer.
    Chairman Towns. Thank you very much, Mr. Secretary.
    I now yield to the gentleman from California, the ranking 
member, Congressman Issa, for 5 minutes.
    Mr. Issa. Thank you, Mr. Chairman. I am going to pick up 
pretty much where you left off.
    Secretary Geithner, I think you have answered that you 
played no role in the decision to not disclose the full 
payment, the 100 percent payment, to the counterparties, that 
you were not part of what some of us have called a cover-up. Is 
that right?
    Secretary Geithner. Absolutely.
    Mr. Issa. OK. Let me followup, then. If, after November 
24th, you were not involved in any activity, then one more just 
to be clear. Did you ever become involved with the Federal 
Reserve's disclosure decision with respect to AIG counterparty 
claims after your nomination as Treasury Secretary? In other 
words, have you ever participated or questioned or stayed 
involved with that?
    Secretary Geithner. No, I did not.
    Mr. Issa. Well, from what we were given by the Fed, could 
we put up slide 1? This email from you says--to William Dudley, 
your replacement, on March 2009--OK, it is easier to read on 
the screen--Where are you on the AIG counterparty disclosure 
issue? Long after you left you made this email. What was it 
about and what was the answer?
    Secretary Geithner. Well, Congressman, as you know, this 
question of disclosure was the subject of a huge amount of 
controversy and most people----
    Mr. Issa. You think?
    Secretary Geithner. Yes. That is what my son says, and I 
agree with you. And I think most people feel as you do, they 
said why shouldn't it be disclosed? Why shouldn't it be 
disclosed? And, as you know, in March--which I think, if I am 
not mistaken, was the time of this email----
    Mr. Issa. Yes, March 15th.
    Secretary Geithner [continuing]. It had been subject of 
testimony by the vice chairman of the Federal Reserve, and the 
Federal Reserve was facing a huge amount of pressure and 
attention over what it disclosed. So I assume I was doing what 
you might expect in that context in asking them where were 
they, were they going to change their position.
    Mr. Issa. OK. Well, then, following up on your continued 
involvement looking at them, where are you on this? Do you 
believe that there should be full disclosure, as the President 
has said that these kinds of instruments should be public, that 
essentially, they be like any other instrument, the details of 
which should be available broadly?
    Secretary Geithner. Congressman, I believe deeply that 
trust and confidence in the financial system requires 
disclosure and transparency. I believe that trust and 
confidence in the Government requires that our actions be 
subject to full exposure and review by careful independent 
analysis. And I have been very, very supportive, since I came 
into office and before, to making sure we were bringing an 
unprecedented level of disclosure to the transparency around 
the actions of the Government. I will just give you a few 
    When I came into office, we put the financial terms of all 
of the transactions we undertook under the TARP in the public 
domain for everyone to see. One of the reasons our financial 
strategy has been successful in bringing a measure of stability 
back to our system is we compelled the largest institutions in 
the country to subject their balance sheets to a level of 
    Mr. Issa. Well, Secretary, I appreciate what you have been 
doing as Treasury Secretary, but I have in front of me from the 
Fed, marked confidential, the details of who benefited, who got 
these benefits, and currently it is locked up until 2018 by an 
order that wasn't negotiated and final until May of this year--
May of last year, long after you were obviously able to be 
involved, that locks up the public knowing, and these are 
assets the American people have paid for in full, right? Do you 
believe that we should know about these?
    Secretary Geithner. Congressman, that is an issue that I 
think you need to direct to the New York Fed and to the SEC.
    Mr. Issa. OK. Well----
    Secretary Geithner. You asked me a question that I didn't 
quite get a chance to answer before, which is you said what was 
my view, in effect----
    Mr. Issa. Yes.
    Secretary Geithner [continuing]. Of what the Fed ultimately 
did. It is very important to recognize that the Fed did, in 
March 2009, fully release information of the counterparties and 
the details of that transaction, and based on what I know, I 
thought the decision was appropriate then. Now, I know a lot of 
people have said shouldn't that have come sooner I think 
reasonable people could come to that judgment, but I did not 
stand in their shoes.
    Mr. Issa. Now, as a member and the head of the New York 
Fed, and also, I guess, broadly a member of the board 
generally, until you were sworn in----
    Mr. Kucinich [presiding]. The gentleman's time has expired.
    Mr. Issa. I will just finish up this one question, Mr. 
Chairman, very quickly.
    You were aware that Chairman Bernanke, in fact, had in 
front of him from the staff a report that said AIG should be 
allowed to go bankrupt, which was then held back on September 
16th based on his decision on September 15th not to disclose 
this for a broad vote of the board, weren't you?
    Secretary Geithner. I am not aware of the email that you 
are referring to, but I am aware of the----
    Mr. Kucinich. The witness may answer the question and then 
we are going to move on to the next questioner.
    Secretary Geithner. Thank you.
    Every decision we made in the days before September 16th 
and afterwards were enormously controversial----
    Mr. Issa. No, no.
    Mr. Kucinich. The gentleman's time has expired.
    Mr. Issa. I understand.
    Mr. Kucinich. The Chair recognizes Mr. Kanjorski.
    Mr. Issa. I would ask unanimous consent to just get an 
answer to the question. It would be very quick.
    Mr. Kucinich. Well, each Member has 5 minutes. We will--
without objection, the witness can answer the question, then we 
will move.
    Mr. Issa. The only question we want is were you aware of 
that? And if you weren't, do you think you should have been 
aware of that for a vote on September 16th? That's all.
    Secretary Geithner. Well, I was aware that there was 
enormous concern both in the New York Fed and at the Federal 
Reserve Board about the choices we were confronting. As I said, 
there is nothing more controversial and difficult than I think 
any we faced in this context, and I think it should be 
reassuring and no surprise that those actions--and the record 
will show that those actions were the subject of enormous 
debate, and they were the subject of debate before the 16th and 
afterwards, and every time we faced the possibility of having 
to do more, we all stepped back and said do we really need to 
do that, does that make sense? And that is a good thing for the 
country, that you had people willing to debate that and argue 
it forcefully.
    Mr. Kucinich. Thank you.
    The Chair recognizes Mr. Kanjorski.
    Mr. Kanjorski. Thank you very much, Mr. Chairman.
    Mr. Secretary, there is a famous expression. I think it 
comes from one of the fine poets of our era: We have come to 
bury Caesar, not to praise him. And I hope you appreciate the 
role of Caesar that you are playing today. But it made me think 
about the fact that last Sunday I watched the ball game and in 
the closing moments of the ball game the quarterback made a 
tremendous decision to pass the football and got intercepted. 
And, as a result, the opposing team took the ball down the 
field, kicked a field goal, and won the game. And I convened 
several meetings in New York after that game and met 
extensively on Monday and Tuesday, and we have concluded that 
he just did the absolute worst thing that he could have done. 
Every one of us at those meetings would have made the correct 
decision after the fact.
    I think the point I am trying to make is I do share some of 
the sympathies with you because I was on the committee and the 
task force that was working with the Secretary and with the 
chairman of the Federal Reserve when the crisis occurred, and I 
caution some of the members I think even of this committee were 
AWOL for the votes that we needed to authorize the saving of 
the American economy.
    As I have heard your testimony, you have come to the 
conclusion that if the rescue package had not been passed by 
the Congress of the United States authorizing the Secretary and 
the President to take extraordinary action and commit hundreds 
of billions of dollars of taxpayers' money, we wouldn't be 
sitting in this room today. We probably wouldn't be operating 
under the Constitution that was saved as a result of that 
precipitous action taken in a very short period of time. Is 
that relatively correct?
    Secretary Geithner. I completely agree. And those Members 
of Congress on both sides of the aisle that voted to authorize 
that action did the right and the necessary and the courageous 
thing, and they made it possible for my predecessor and the 
Federal Reserve to start to stabilize this thing. And it would 
not have been possible without that authority and without that 
    Mr. Kanjorski. I appreciate that. I sometimes--as a matter 
of fact, I took that argument to the White House at that time. 
If you remember, the President was not as outspoken, and I 
always was convinced that in a democracy such as ours, 
transparency, both in bad news and dangerous news, must be 
shared with the people. And part of the problem at that time, 
we didn't share that news. And even to today, most people in 
this audience and most people throughout America have no idea 
how close we came to total annihilation and disaster. Is that 
    Secretary Geithner. That is my view. I think for the first 
time since the Great Depression you were seeing a full scale 
run on the financial system. People were taking their savings 
out of banks. They wondered whether a dollar was a dollar; 
whether their dollar in a money market fund would be worth a 
dollar. They worried about whether a dollar lent to a AAA 
company would be worth a dollar. It was a basic calamitous 
breakdown in the fabric of our system and no recovery would 
have been possible without starting to stabilize the system and 
stem the bleeding, and that was something that could not happen 
without the authority that, as I said, many people in this 
room, many people on both sides of the aisle voted to approve.
    Mr. Kanjorski. Am I correct that there were discussions 
held at the highest echelons of the U.S. Government and the 
Congress at that very time as to whether or not law and order 
could be secured in the United States if we did not take 
precipitous actions to assure the people that the economic 
markets in the United States and the world would be held 
    Secretary Geithner. I was not in the executive branch at 
that time, so I can't speak to that, but it would not surprise 
me if that was the case. Again, this was the gravest crisis we 
had seen since the Great Depression. It was not going to solve 
itself. Many people advocated we should let it burn itself out, 
but that would have been catastrophic for the economy. We are 
still living with the consequence of the damage and the 
wreckage. The scale of the challenges we face today as an 
economy are rooted in that crisis and they illustrate the force 
of the pressure and the momentum that was already--we were 
already living with in August of that summer.
    Mr. Kanjorski. All the decisions made in those fateful 2 
weeks weren't the correct decisions, were they?
    Secretary Geithner. Oh, Congressman, I think every day 
about things we could have done differently and done early, and 
I think a great strength of this country is that people in the 
Congress, in independent oversight bodies, in the financial 
crisis commission were all going to take a cold, hard look at 
everything that was done, and that will give us a better 
    Mr. Kucinich. The gentleman's time has expired. You may 
continue with your answer.
    Secretary Geithner [continuing]. And that will give us a 
better basis for fixing this mess and preventing it from 
happening again, and we will cooperate fully in all that 
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Mr. Kucinich. I thank the gentleman.
    The Chair recognizes Mr. Burton.
    Mr. Burton. Thank you, Mr. Chairman.
    Your counsel, one of your counsels, James Bergen, said on 
March the 12th, I don't know if there is any way to manage it 
so that Congress won't ask for it or, if they do, won't release 
it. Does he work for you, or did he work for you?
    Secretary Geithner. Yes, he did.
    Mr. Burton. Does your legal counsel have the authority to 
make comments and decisions without your knowledge?
    Secretary Geithner. Of course. But----
    Mr. Burton. Regarding something of this import?
    Secretary Geithner. Well, as president and CEO of the New 
York Fed, of course, I was ultimately responsible----
    Mr. Burton. This doesn't require a long dissertation.
    Secretary Geithner. No, it's not a long----
    Mr. Burton. All I want to know is do they have the 
authority to make these kinds of comments and decisions without 
you knowing about it.
    Secretary Geithner. Of course.
    Mr. Burton. On November the 11th, when you were still at 
the Fed, an internal memo said, as a matter of course, we do 
not want to disclose that the concession is at par unless 
absolutely necessary. Are you familiar with that memo?
    Secretary Geithner. Not with that email. As I said, I was 
not involved in decisions about what to disclose about the 
individual transactions or the names of counterparties. But I 
have enormous trust and confidence in the integrity and 
judgment of people who were.
    Mr. Burton. On March the 15th, after that, we had up on the 
board there a few minutes ago the email to Mr. Dudley that said 
where are you on the counterparty disclosure issue? And Dudley 
responded, my understanding is that it is in train and could 
come out as early as today. Are you familiar with that?
    Secretary Geithner. I don't recall his response, and I 
didn't recall my email until you put it in front of him, but 
now I see it.
    Mr. Burton. You don't remember that?
    Secretary Geithner. No, I don't, but I do remember at the 
time there was still enormous building pressure on the Fed to 
disclose and they did disclose.
    Mr. Burton. But you still maintain that you weren't 
involved in any of this?
    Secretary Geithner. Yes, absolutely.
    Mr. Burton. Were you aware that all of these organizations 
around the world, Societe Generale, Goldman Sachs, Merrill 
Lynch, Deutsche Bank, UBS, were all getting 100 cents on the 
    Secretary Geithner. Absolutely.
    Mr. Burton. You were aware of all that? Why wasn't this 
disclosed back in November, when you were head of the Fed?
    Secretary Geithner. Well, again, that is a question you 
need to direct to the people who were responsible for that 
    Mr. Burton. Well, you were the head of the Fed.
    Secretary Geithner. I was the head of the Federal Reserve 
Bank in New York until I was confirmed by the Senate for this 
    Mr. Burton. Why wouldn't this have been disclosed by you 
back then? I mean, you are saying that--what, was this a group 
that made the decision?
    Secretary Geithner. Congressman, I don't know how to say it 
any differently, but when the President announced his intention 
to nominate me, I withdrew, appropriately, from a whole range 
of policies decisions of the Federal Reserve Bank of New York 
in part to protect the Fed, in part so I could do my job of 
helping the President prepare for how to fix the mess we 
inherited. Now, because of that I was not involved in those 
decisions. But I want to say the people who made those 
decisions did so----
    Mr. Burton. This happened on November the 11th, before you 
    Secretary Geithner. What happened on November----
    Mr. Burton. This knowledge.
    Secretary Geithner. Oh. Mr. Chairman, as I said in my 
testimony, I wasn't----
    Mr. Burton. Why wasn't it disclosed back then?
    Secretary Geithner. Well, we didn't face that choice then. 
I was directly involved in the judgments that we collectively 
    Mr. Burton. You didn't face the choice back then?
    Secretary Geithner. No, we didn't. No. But the choice that 
I was deeply involved in, fully support, believe was the right 
choice was the decision to restructure these contracts in a way 
that was better for the taxpayer and prevented the fall of the 
company. I was fully supportive of that, fully aware of that.
    Mr. Burton. It stretches credulity for us to believe that 
you had no role in this and didn't know anything about it when 
your attorneys and people that worked for you were sending 
emails all around the place, and you were the head of the Fed 
and you didn't know anything about it? It just doesn't make any 
sense to me, and I think a lot of my colleagues feel the same 
    Secretary Geithner. Congressman, I was president of the New 
York Fed throughout that time. I was--we were involved, as you 
know, in an extraordinary complicated range of things.
    Mr. Burton. But this is major stuff.
    Secretary Geithner. The decisions around AIG were major and 
hugely consequential, and they were done with enormous care and 
judgment. But the choices around disclosure, which 
understandably are the focus of so much attention, are not 
judgments I could speak to.
    Mr. Burton. Let me just finish by asking you this. Do you 
think that there ought to be an annual audit of the Fed?
    Secretary Geithner. I am very supportive----
    Mr. Kucinich. The gentleman's time expired, but, Mr. 
Secretary, you may answer the question.
    Secretary Geithner. I am very supportive, as part of 
financial reform, of trying to make sure that the Fed is 
subject to an aduate level of transparency and disclosure and 
oversight, and the chairman of the Federal Reserve has worked 
with many Members in Congress in helping shape reforms that 
would achieve that outcome.
    Mr. Burton. I'll take that as a yes.
    Secretary Geithner. In doing that, though----
    Mr. Burton. I'll take that as a yes.
    Secretary Geithner. In doing that, though, I want to be--it 
is very important we protect the independence of the Federal 
monetary policy issues. It would be a deep mistake for the 
country, a grave mistake for the country to threaten that 
    Mr. Kucinich. The Chair recognizes Mr. Cummings. You may 
    Mr. Cummings. Secretary Geithner, I don't know whether you 
realize this, but it was the Democrats that asked for this 
hearing. I specifically asked for this hearing. Did you know 
    Secretary Geithner. I believe I did know that.
    Mr. Cummings. And let me tell you that when I asked for the 
hearing, I must tell you that I was extremely concerned and I 
was questioning whether you had acted appropriately. And I 
think anyone who read headlines back then, when this hearing 
was requested, would have come to at least the question mark.
    Now, you sat here a few moments ago and you swore that you 
would tell the truth, is that correct?
    Secretary Geithner. I did.
    Mr. Cummings. Is that correct?
    Secretary Geithner. I did.
    Mr. Cummings. And I assume that the statement, your written 
statement is a statement which you would also swear to?
    Secretary Geithner. Absolutely.
    Mr. Cummings. And I can tell you that as I read your 
written statement, I am trying to figure out, as far as the 
initial getting involved with AIG and what you all did, I don't 
know what anybody else would have done. I don't think we had a 
choice, or that you had a choice. So let me say that I think we 
did the right thing there.
    Now, this is where it gets sticky. We also have a 
situation, Secretary Geithner, where the American people are 
concerned that a lot is being done for Wall Street, but not 
enough being done for Main Street. You understand that?
    Secretary Geithner. Absolutely.
    Mr. Cummings. And one of the interesting things is that you 
talked about how, if you had not taken the action from the 
beginning, how it might have affected Main Street, the 
constituents of all 435 Members. Can you tell us, if you hadn't 
taken the action, how might it would affect students in my 
district or businesses or whatever? Can you tell us that? 
Because I don't think that is getting through.
    Secretary Geithner. Thousands of more factories would have 
closed their doors. Millions more Americans would have lost 
their jobs. The value of America's houses and savings would 
have fallen even further than they did at that time. People 
would have rushed to take their money out of banks. It would 
have brought about utter collapse. I don't know a better way to 
say it than that.
    And if people wonder whether that was true, I think all 
they have to do is look back at what actually happened in the 
fall of 2008, and you saw the value of American savings fall by 
almost 40 percent; trillions of dollars in lost wealth. 
Millions of Americans lost their homes; thousands and thousands 
of businesses had to close.
    That is what happens when you let a financial crisis get 
out of control. Governments should never let that happen, but 
if they don't act--and this is a very important thing for 
people to understand. People think it is unfair for the 
Government to act to rescue a financial system. But you cannot 
help an economy recover, you can't create jobs, you can't 
preserve the value of people's savings without a functioning 
financial system.
    Mr. Cummings. Another moment, when we requested the 
hearing, that I was concerned about was this counterparties. As 
you probably know, I, along with 26 other Members of Congress, 
requested that SIGTARP, Barofsky, look into that whole issue, 
and there have been comments that the capital levels of the 
counterparties were tenuous, and had they not been paid in 
full, they risked collapse. Was this a real possibility?
    Secretary Geithner. In my judgment, that was not the most 
important risk posed by AIG. AIG's failure would have posed 
some direct losses on those major banks, but those losses 
themselves were not the issue; they would not have been 
significant. The threat to the system--and this was a threat to 
all institutions operating--was the threat of collapse of the 
system as a whole. And if AIG had failed, you would have seen a 
crisis spread to insurance companies around the world and you 
would have seen investors, depositors, creditors, pull back 
from every financial institution in the world, and that would 
have brought a much more precipitous collapse in all financial 
    Mr. Cummings. My time is running out. Just real quick. When 
the public has so much invested in a company, isn't it better 
to err on the side of transparency, Mr. Secretary, as opposed 
to keeping things secret?
    Secretary Geithner. Of course. Of course.
    Mr. Cummings. So what would push the decision to not be as 
transparent? I mean, what would cause that?
    Secretary Geithner. There are very few cases where it is 
necessary for there to be either a lag in disclosure or some 
gap. I am not sure how to--the best way to explain this, but 
like in national security, like in law enforcement----
    Mr. Kucinich. The gentleman's time has expired, but you can 
conclude your answer.
    Secretary Geithner [continuing]. Like in the protection of 
confidential supervisory information, but also to protect the 
taxpayer, there are some areas in which you need to be careful 
about how you manage that. That is a discussion, though, you 
should have with my colleagues at the Fed; they are in a better 
position to answer it. But we would not want to disclose 
information that would be bad for the taxpayer, make it harder 
for the taxpayer to recoup our investments.
    But, in general, Congressman, I completely agree that 
transparency and disclosure are essential, the American people 
deserve it and we have been very effective in bringing an 
unprecedented level of security to all the basic actions we 
took in this financial crisis, an unprecedented level of 
transparency in disclosure.
    Mr. Kucinich. Thank you.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    Mr. Kucinich. Thank you.
    The Chair recognizes Mr. Mica.
    Mr. Mica. Thank you, Mr. Chairman.
    Mr. Secretary, it is kind of interesting the way you have 
framed your testimony and your involvement in some of these 
decisions before the committee today. I think you have tried to 
give the impression that you had to do what you had to do 
because of the financial situation. That is pretty much what 
you have said, right?
    Secretary Geithner. Oh, absolutely.
    Mr. Mica. Thank you. And then you used the term--you kept 
using the term we made decisions together. Then you said a 
dividing line of November 24th. Is that when you received word 
that you were going to be nominated for Treasury Secretary?
    Secretary Geithner. That is when the announcement was made.
    Mr. Mica. Yes. So you have tried to distance yourself from 
decisions that were made before that, but, in fact----
    Secretary Geithner. No, no, I have not tried to distance--I 
take pride and full responsibility for all those decisions.
    Mr. Mica. OK. Then you also were aware when the New York 
Federal Reserve Board ultimately selected, on November 3, 2008, 
to purchase the underlying assets?
    Secretary Geithner. Oh, absolutely.
    Mr. Mica. You were.
    Secretary Geithner. And, again, as I said, I take pride in 
that decision.
    Mr. Mica. Also, you had no knowledge of any cover-up, 
right, or intent not to give full information and disclosure.
    Secretary Geithner. Of course not.
    Mr. Mica. Of course not. So you took credit for the 
decision but not the cover-up.
    Secretary Geithner. No, no----
    Mr. Mica. Then you distance yourself from any cover-up 
before November 24th. And then, of course, you were out of the 
picture from November 24th forward, is that correct?
    Secretary Geithner. Congressman, I am not trying to 
distance myself from anything. I will take complete 
responsibility for decisions I played a role in shaping or was 
part of shaping, including all decisions up to the 24th on this 
case. And I am happy to take responsibility for all decisions I 
have made since then too.
    Mr. Mica. Then you were aware of 100 cents on a dollar 
    Secretary Geithner. Absolutely.
    Mr. Mica. Absolutely. And the risk that was posed by that 
offer. So you knew about that, but you weren't attempting to 
cover up, that is your testimony today?
    Secretary Geithner. Of course not.
    Mr. Mica. OK. So I believe either you made a bad decision 
there or in fact there was the attempt to cover up one of the 
biggest bailouts, back-door bailouts, in history. Now, you have 
tried to frame it as you did it because you did it in the 
interest of the people and the failure of the system. I am 
telling you I believe these are lame excuses. Either you were 
in charge and did the wrong thing or you participated in the 
wrong thing. To me, it appears like when you were being 
confirmed, a lot of controversy surrounded your not paying your 
taxes. You gave lame excuses then. I believe you're giving lame 
excuses now.
    My final question is why shouldn't we ask for your 
resignation as Secretary of the Treasury? I didn't think you 
should have been Secretary of the Treasury when it was 
disclosed that you didn't pay your taxes, because that is the 
highest financial responsibility position in the U.S. 
Government. So why shouldn't you step down now?
    Secretary Geithner. That is your right. That is your right 
to that opinion. I have worked in public service all my life. I 
have never been a politician. I have served my country as 
carefully and ably as I can, and it is a great privilege for me 
to work with this President to help repair the damage that was 
here when we took office. And I will do so as long as he asks 
me to do so to the best of my ability, with great pride in this 
country and in him.
    Mr. Mica. Again, I think you're punting the blame and I 
think you're trying to position yourself as----
    Secretary Geithner. Congressman, you don't know me very 
    Mr. Mica [continuing]. And yet----
    Secretary Geithner. You don't know me very well. I will 
    Mr. Mica [continuing]. I believe that we are not getting 
the whole story; we are getting a lame story in a monumental 
back-door decision of bailout for which the American taxpayers 
will stay on the hook for huge amounts of money. Even by 
estimates of the Treasury Department, there will be billions of 
dollars from this deal, which either you should have been 
overseeing, and you said you had knowledge of and you failed to 
take some steps to further protect the taxpayer interest. You 
were either incompetent on the job or you were not doing your 
job and knew what was taking place and tried to conceal it, and 
I think that is grounds for your removal.
    Secretary Geithner. Congressman, I was there. I know what I 
was responsible for. I take full responsibility and, as I said, 
great pride in those judgments.
    Mr. Kucinich. The gentleman's time has expired, but the 
Secretary may answer the question as he sees fit.
    Mr. Mica. He takes great pride in those judgments.
    Secretary Geithner. I do. I take great pride in those 
judgments. And people have a right to disagree with them and 
they have a right to go back and look at them with great care 
and analysis. And I hope you will give the same care and 
judgment to looking at those decisions in retrospect, with the 
benefit of hindsight, that we gave in making those decisions at 
that time.
    Mr. Kucinich. I thank the gentleman.
    It is my time to ask questions and I am yielding myself 5 
    Mr. Geithner, the New York Fed agreed to Goldman Sachs' 
demands for billions to settle its counterparty claims with 
AIG, 100 cents on a dollar, but for more than a year before 
that Goldman and AIG had been locked into a dispute over that 
money and Goldman believed it would lose up to $2.5 billion if 
AIG defaulted. Did you know at the time that Goldman Sachs had 
concluded it would not receive 100 cents on the dollar from AIG 
in the event of default?
    Secretary Geithner. I did not know, and I don't know 
whether that is true or not.
    Mr. Kucinich. Goldman had said publicly that they didn't 
need the Government's money, that it was fully hedged and would 
not have been materially affected if AIG had defaulted. But 
that turns out to be disingenuous. Committee investigators have 
learned that Goldman's supplemental insurance policy would not 
pay in the event that the U.S. Government bailed out AIG. 
Goldman's protection would pay only in the event AIG defaulted. 
Goldman had not anticipated the Government bailout and so 
hadn't put that contingency into the terms of its contracts. 
That failure put Goldman at real risk of losing the entire 
amount of disputed money once the Government rescued AIG.
    Did you have any knowledge at the time, did Lloyd Blankfein 
or anyone at Goldman ever admit to you or anyone working under 
you that Goldman Sachs was not fully hedged in the event the 
Government took over AIG, and that Goldman was at risk of 
losing at least $2.5 billion if the Government bailed out AIG 
and imposed less than 100 cents on the dollar on 
    Secretary Geithner. Congressman, I am not aware--and I 
don't see how I could have been aware--of the precise details 
of the hedging strategies of all those firms to the event of a 
default by AIG. But we made a very careful effort to try to 
assess, working with the supervisors of all the institutions at 
exposure to AIG about what their economic exposure would be----
    Mr. Kucinich. Had you talked to Lloyd Blankfein, for 
example, about this? Do you remember talking to him?
    Secretary Geithner. In the Goldman Sachs case in 
particular, because there were a lot of press reports that were 
consequential in this case, I did ask them directly what their 
exposure was and I asked them to show me what their internal 
information system reports showed about that exposure.
    Mr. Kucinich. The committee, if I may, is going to have a 
series of questions to submit to you in writing----
    Secretary Geithner. Happy to answer those questions.
    Mr. Kucinich [continuing]. So that you will be given an 
opportunity to have an extensive answer on this point.
    Secretary Geithner. Happy to answer those questions.
    Mr. Kucinich. Now, Mr. Secretary, once the Government 
stepped in, there was only one way for Goldman Sachs to get any 
piece of the $2.5 billion, and that was if the New York Fed 
voluntarily agreed to give it to them. Now, if the New York Fed 
had fought for taxpayers, Goldman would have lost money it 
didn't have any hope of recovering. In spite of public 
statements to the contrary, the New York Fed had a lot of 
leverage, a lot of leverage, to negotiate a reduction, which 
would have saved taxpayers billions. But, instead, the New York 
Fed took Goldman Sachs' position in its dispute with AIG and 
settled it fully with taxpayers' money.
    Now, Mr. Geithner, under normal circumstances, Goldman 
Sachs would have had to sue AIG in court to recover the 
disputed $2.5 billion, and they would have settled for 
something less than that. Isn't it true that the New York Fed 
gave Goldman Sachs a better deal than it could have ever 
expected from AIG or any market player at any other time?
    Secretary Geithner. Congressman, if we had the ability, 
like we have for normal companies seized, to put them through 
bankruptcy, if we had the ability, like we have for banks, to 
put them into an orderly wind-down process like quasi-
bankruptcy, we could have done many things. But under the laws 
of the land, we did not have the ability, so we faced a very 
simple choice: let AIG default or prevent it. And there was no 
way--financial, legal, or otherwise--we could have imposed 
haircuts, selectively default on any of those institutions, 
without the risk of downgrade and default, and that is the only 
    Mr. Kucinich. I just want to say, Mr. Secretary, since when 
does saving the system require the taxpayers to give a better 
deal than the market would normally deliver? Yet, that is what 
the New York Fed did. The Government gave Goldman Sachs more 
than Goldman Sachs had any right to expect, while at the same 
time giving no financial relief whatever to millions of 
Americans facing a foreclosure crisis. And if that doesn't 
illustrate what the New York Fed thought who it was working 
for, I don't know what does.
    Secretary Geithner. Congressman----
    Mr. Kucinich. You may respond and then my time has expired.
    Secretary Geithner. Congressman, that is not true, and it 
is unfair to the public servants----
    Mr. Kucinich. What is not true?
    Secretary Geithner. What you just said.
    Mr. Kucinich. What? What isn't true?
    Secretary Geithner. It is not true that the actions we took 
in AIG were for the benefit of anybody but the millions of 
Americans who, at that point, were suffering from the worst 
financial crisis since the Great Depression. The only way to 
help reduce that damage, protect that damage, was to fix the 
system and prevent the catastrophic failure that would have 
made that crisis worse. That is the only motive that 
underpinned these actions by the Government.
    Mr. Kucinich. I thank the gentleman. My time has expired.
    The Chair recognizes Mr. Duncan.
    Mr. Duncan. Thank you, Mr. Chairman.
    Mr. Secretary, you talked about looking at these events 
with the benefit of hindsight. Two men who did were Peter 
Boone, who is a researcher at the London School of Economics, 
and Simon Johnson, a professor at MIT----
    Mr. Kucinich. Could the gentleman be closer to the mic so 
we can hear you? Thank you.
    Mr. Duncan [continuing]. Simon Johnson, a professor at MIT 
Sloan School of Management, and they wrote in the New Republic 
magazine, in the September 23rd issue, ``The Fed may well have 
mitigated our current crisis by sowing the seeds for the next 
one,'' and they say, in fact, the Fed has exacerbated the 
possibility of another similar or even larger crisis. In fact, 
the way they put it, they say, ``As a result, unless real 
reform happens soon, we face the prospect of another bubble 
burst bailout cycle that will be even more dangerous than the 
one we have just been through.''
    Now, I assume you know that the American people are very, 
very angry about these bailouts and the bonuses and salaries 
that have come about through what most people see as a big 
government-big business duopoly, and they feel like this big 
government-big business duopoly has been manipulated in such a 
way as to allow just mind-boggling salaries and bonuses, and 
allowed very few elitists at the top to come out like robber 
barons to an extent really not known in American history. 
Because of big government, through the Federal Reserve system, 
our free market system was not allowed to operate, and it seems 
to most of us that it is not capitalism when Government uses 
billions and billions of taxpayer money to prop up a very few 
well-connected firms.
    Now, that leads me to two questions. One, has the Treasury 
informed any of these financial giants that we will not follow 
too-big-to-fail policies in the future? And, second, do you 
think we should limit these salaries, these ridiculously 
excessive salaries and bonuses, that are even being talked 
about even today in any of these firms that got taxpayer 
bailout funds?
    Secretary Geithner. Congressman, that was a very thoughtful 
question. You asked exactly the right question. In a financial 
crisis, you face this tragic choice: you can let it try to burn 
itself out and let the damage spread to all sorts of innocent 
victims, or you can act to prevent it, knowing that acting to 
prevent it will create the risk that in the future investors 
will expect the Government to step in in the future and save 
firms from the consequences of failure. That is the dilemma at 
the heart of strategy in financial crisis.
    To stand back and let it burn is irresponsible. It is what 
happened in the Great Depression. It almost happened to this 
country. The moral, just, pragmatic, fair choice--and this 
should be true if you are a Republican or a Democrat--is to act 
to protect the innocent.
    But, as you said wisely, by definition, that creates the 
risk we sow the seeds for future crises, and that is why, in 
the financial reform problem, we all have a huge stake in 
trying to make sure we not just limit risk-taking in the 
future, but that investors and equity holders and creditors and 
managers and executives do not run these firms with the 
expectations the Government will be there again. And that is 
why it is so important we put in place types of bankruptcy 
mechanisms that we have now for banks but we do not have for 
institutions like AIG.
    Now, absolutely, we have made clear in public, in crystal 
clear terms, in reform proposals that are now moving through 
the Congress, that we need to end this expectation of too-big-
to-fail and Government assistance. And if you look at what we 
have done since we came to office, we have moved very 
aggressively to pull the Government out of these institutions, 
to make sure we are not in these institutions a day longer than 
is necessary, to replace the public capital with private 
capital; and we have done that by forcing disclosure and 
forcing firms to recapitalize with private money, precisely 
because we want to limit the scale of the Government's 
involvement and end this exceptional period as quickly as we 
    And that strategy has been very, very effective in ways 
that people on the right and the left should welcome. On the 
right, it means that the Government is out much more quickly 
than anybody expected; on the left, people should know, with 
confidence now, that we have far more resources now available 
to help address the long-term challenges we face as a country 
to reduce our long-term deficits and try to meet the things 
that we have to do to fix what was broken in this country.
    But you asked a very good question and I agree very much 
with the thrust of your concern.
    Mr. Duncan. Well, that was a good answer to my first 
question, but my second question was do you think bonuses and 
salaries should be limited in any way in these firms that did 
receive Government bailout money?
    Secretary Geithner. I think----
    Mr. Kucinich. The gentleman's time has expired, but please 
answer the question.
    Secretary Geithner. I think what happened to compensation 
across this country and in the financial system was terribly 
catastrophic. It is judged--it came in the wave of a huge 
increase in income inequality in the United States over 
decades. In the financial system it was much worse and it was 
much more consequential because it helped encourage a level of 
risk-taking that again brought the system to the edge of 
    So it is deeply important in the public interest of the 
country that Congress legislate reforms that will change how 
bankers are paid. Government can't do it alone, though. 
Shareholders and their representatives on the boards of these 
firms have to bring about much tougher limits on how firms are 
paid. I think that is very important to do and I hope we will 
have support from the Congress in making sure we have the basis 
for doing that.
    Mr. Kucinich. I thank the gentleman.
    The Chair recognizes Mr. Lynch of Massachusetts.
    Mr. Lynch. Thank you, Mr. Chairman.
    Mr. Secretary, I am well aware of your family's commitment 
to public service, so it makes it more difficult, in a sense, 
to ask these questions, but I honestly feel that the conduct of 
yourself and Mr. Paulson were not consistently on the side of 
the American taxpayer, and I will explain why. I will give you 
two examples.
    We had the situation with Bear Stearns. The circumstances 
are the same: the world is on the brink; we have a disaster; we 
are worried about the whole system melting down. With your 
support and Mr. Paulson, Mr. Bernanke, we forced Bear Stearns 
shareholders from a position, I think it was a high of $172 a 
share in January. We forced them down to $2 a share because the 
American taxpayer money was in the bailout. And that was 
something that was supported by the Fed, by Treasury because we 
felt that because the taxpayer was bailing them out, that the 
shareholders of Bear Stearns should not be held harmless.
    Now, you have a different situation here, slightly 
different. A number of weeks later, where we have AIG going 
under. And these are credit default swaps, so the money going 
into AIG is going right out to the counterparties. This is a 
pass-through. And the folks on the other side are Goldman 
Sachs, largely. That is the principal beneficiary of all this. 
And we don't negotiate a nickel, not a cent off of what they 
are getting. You are in the same position. You are supposed to 
be negotiating on behalf of the American people.
    Now, you are saying, oh, the regulations were different. 
Let me tell you something. We were changing the rules and 
regulations every single day. We were taking action, the Fed, 
under 13.3 under extraordinary circumstances. You had every 
opportunity, every opportunity to weigh in on behalf of the 
American people and make these people take a new deal, make 
them take a haircut. You scalped the folks on Bear Stearns; 2 
cents on a dollar they got; 2 cents on a dollar. The folks at 
Goldman Sachs got 100 cents on a dollar. And that is just 
unacceptable. Totally unacceptable. You had the opportunity and 
I just think it was a terrible decision on your part, and also 
on Mr. Paulson's part; and he is up later and we will talk to 
    Secretary Geithner. Congressman----
    Mr. Lynch. How do you expect to--look--and the thing about 
changing over to the Obama administration, you get the same 
people who are relying on you, the American taxpayer when you 
are in one job and the American taxpayer is relying on you in 
the other job. I don't see a conflict. I really don't. You 
could have done the right thing by those people, by the 
American taxpayer, because their money was being put into this 
    Secretary Geithner. Congressman----
    Mr. Lynch. And it just stinks to the high heaven what 
happened here----
    Secretary Geithner. Congressman----
    Mr. Lynch --and I don't like the obfuscation. And to top it 
all off, the disclosure was not there. The disclosure was not 
there at the proper time to tell the American people and tell 
this Congress what was going on, and that is just inexcusable 
and it makes me doubt, it makes me doubt your commitment to the 
American people, it makes me doubt Mr. Paulson's commitment to 
the American people, and I think the commitment to Goldman 
Sachs trumped the responsibility that our officials had to the 
American people.
    Secretary Geithner. Congressman, I respect your opinion. I 
know you hold those opinions strongly, but I completely 
disagree. The American taxpayer would not have been better off 
if the Government had made it possible for equity holders in 
Bear Stearns to get more money. The American taxpayer would not 
have been better off if we had let AIG default. None of us did 
anything out of any concern for----
    Mr. Lynch. There is a difference between giving them 100 
cents on a dollar and letting them default. This was a new 
game. You were creating new facilities every week to help 
    Secretary Geithner. We were. We were because----
    Mr. Lynch. We were letting people go to the discount window 
that never had an opportunity to do that. We were changing the 
rules day by day and we had the banks at a position where we 
could have exercised a lot of leverage, and you chose not to do 
    Secretary Geithner. I disagree.
    Mr. Lynch. You chose not to do it.
    Secretary Geithner. I disagree with you----
    Mr. Lynch. And that doesn't mean we have to pay them 100 
cents on the dollar or we let them fail. There are increments 
here and we never used that leverage.
    Secretary Geithner. Not in this case.
    Mr. Lynch. In this case exactly.
    Secretary Geithner. No, not in this case.
    Mr. Lynch. Under 13.3 we could have taken different steps 
than we took here.
    Secretary Geithner. Thirteen three had nothing to do with 
this in this particular case. What 13.3 was--and this is 
important for people to understand--13.3 was authority given to 
the Federal Reserve to protect the financial system from broad-
based runs. It gave us the authority only to lend against 
collateral to make sure that firms that were solvent could 
fund. We did that because of the catastrophic damage caused by 
decades of previous financial crises. We used that authority 
because we thought there was no other choice and we used that 
authority appropriately.
    Mr. Lynch. Look, let me just say----
    Chairman Towns [presiding]. The gentleman's----
    Mr. Lynch. Reclaiming my time.
    When Hank Paulson pulled nine banks into a room and said 
you're taking bailout money, that was extraordinary action, OK?
    Chairman Towns. The gentleman's time has expired. I must 
move on.
    Mr. Lynch. He could have done the same thing negotiating a 
better rate on behalf of the American taxpayer.
    I yield back.
    Secretary Geithner. If it would have been possible, we 
would have done it. Why would I want to be sitting here before 
you today having to defend actions that look like they could 
have been avoided? There is nobody who was part of that 
decision that would not have done that if it would have been 
possible. I try to be as careful as I can in explaining the 
reasons why it was not possible, but it comes down to this 
basic tragic choice: If you are prepared to default, you can 
impose haircuts; if you can't accept the consequences of 
default, you do not have any leverage. It would have been 
vastly more expensive to the American taxpayer. It would have 
been much more damaging to people you and I care about, people 
you and I wake up every day worrying about, if we had let that 
firm fail. There was no choice between default and the 
restructuring of those contracts, and they left the taxpayer 
better off----
    Mr. Lynch. There was no shared sacrifice, no shared 
sacrifice for Goldman Sachs and the American people.
    Chairman Towns. Would the gentleman from Massachusetts 
yield? The gentleman's time has expired and I now call on Mr. 
Turner from Ohio.
    Mr. Turner. Thank you, Mr. Chairman.
    Mr. Geithner, in answer to one of my colleagues, you 
previously stated that you had never been a politician. I want 
to assure you, from your answers today, that you are absolutely 
a politician. And let me tell you one of the examples----
    Secretary Geithner. Do you mean that as a compliment or 
not? I can't tell.
    Mr. Turner. Let me tell you one of the answers that 
troubled me about the issue in your written testimony of the 
team concluded AIG's failure would be catastrophic. You go on 
to talk about the insurance arms of AIG. Now, this is not the 
first hearing that this committee has had or other committees, 
and you know that we are aware of the independence of the 
insurance arms of AIG. We have Maurice Greenberg, a former 
chairman and CEO of AIG, said, ``to the best of my knowledge, 
the problems that came to a head this year did not originate in 
AIG's insurance businesses, which remain fundamentally 
    We had the head of the New York State Insurance Department, 
Superintendent Eric Dinallo, came in and said this, ``before I 
go further, I would like to make one critical point. It is 
important for everyone, and especially policy holders in AIG 
insurance companies, to understand that the insurance 
companies, which are regulated by New York and other States, 
are solvent and have the funds to pay any policy holders' 
claims; they had independent reserves.''
    You did not bail out the insurance companies of AIG, 
correct? They didn't need it. You bailed out the parent, right?
    Secretary Geithner. Yes. But if the parent had defaulted--
    Mr. Turner. So when we go through your answer of if AIG had 
failed, the catastrophic effect of all of the insurance 
companies that were under AIG, they weren't bailed out by you.
    Secretary Geithner. No, that's not true. But maybe this is 
helpful to go back a little bit. When AIG came to us that 
weekend--remember, the Fed is not their regulator; the Fed had 
no responsibility or authority over how they ran their 
business, that was the province of other regulators. It was 
inconceivable to me that this was a problem we were going to 
have to try to solve, and we got all the people we could, 
including the New York State insurance commissioner and his 
staff, other people to look at and explain to us----
    Mr. Turner. Let's pause a second. Did you bail out the life 
insurance arms of AIG?
    Secretary Geithner. Those insurance companies----
    Mr. Turner. Did you bail out the life insurance arms of 
    Secretary Geithner. Well, again, I wouldn't use that term. 
The actions we took helped prevent----
    Mr. Turner. Did you bail out the health insurance arms of 
    Secretary Geithner. Again, the actions we took to prevent 
default of the firm protected those companies from the risk of 
    Mr. Turner. Mr. Geithner, the testimony we have received 
previously, from those who were looking at those arms, was that 
they were substantially sound, so the catastrophic effects that 
you list certainly are something that we would all have been 
concerned about, but nonetheless----
    Secretary Geithner. I disagree completely. People can look 
at this and they can come to different judgments, but the 
people who were responsible for looking at those insurance 
companies frankly had no idea of the risk--and you could not 
separate those companies from the companies that had taken 
terrible risk. The tragic thing in the structure of the company 
was they were so closely linked they couldn't separate them.
    Why would we have not, if it had been possible to separate 
the place that was taking the firm down, to separate that 
cleanly, separate them from this? We would have done that in a 
second. And, in fact, much of what the management of the firm 
is trying to do today, still, 15 months later, is designed to 
achieve that objective. But they were tightly connected; they 
could not have been separated. And the insurance supervisors 
who were responsible for the individual firms did not know the 
extent to which the financial basis of the insurance companies 
was so connected to the holding company and the AIFP that had 
taken all those risks.
    Mr. Turner. Mr. Secretary, as you were going through the 
bailouts and as we look to the counterparties and the funds 
that were received, one of the biggest concerns that I have had 
through all of this process is that I believe that when it all 
becomes public--and it hasn't all become public yet because we 
don't have everything from you--that this may turn out to be 
the largest theft in history, that there were parties that were 
participating, through mortgage-backed securities and through 
other credit default swaps, into defrauding Mr. and Mrs. 
American Citizen on Main Street who was receiving a loan on 
their home that was negative in loan-to-value ratio and also 
had a greater risk than was being reported as the mortgage-
backed securities and credit default swaps were passed up the 
    Do you have any information of AIG knowing that the loan-
to-value ratios were inflated and that the risks were being 
understated? Because I truly believe that throughout this 
system that brought down the systematic mortgage crisis system 
process, that there was a significant amount of defrauding 
going on and that people need to be held accountable, and I 
don't think in your system, where you are bailing out, you are 
taking into consideration those that were bad actors.
    Secretary Geithner. I completely agree that this country 
allowed, under the laws of the land, a terrible erosion in 
underwriting standards, a terrible amount of predation and 
abusive practices in mortgage lending and consumer finance. We 
should never have let that happen. And I hope you will join 
with us in trying to pass reforms to prevent that from 
happening again.
    Mr. Turner. But in your bailout----
    Chairman Towns. The gentleman's time has expired. Hold it a 
    Let me just say something to all the Members. You know, 
right now we have like 30-some Members who still have not had 
an opportunity to question, so we are going to have to stick to 
the time. So I want you to respect that. I mean, I noticed a 
couple of situations where you are going over, but I am saying 
to you that when the red light comes on, that is it.
    We are now moving to Mr. Quigley of Ohio. Illinois, I am 
sorry. Mr. Quigley of Illinois. Is he here?
    Ms. Kaptur of Ohio.
    Ms. Kaptur. Thank you, Mr. Chairman.
    Mr. Secretary, welcome. Can you provide for the record a 
copy of the recusal agreement that you signed when you were at 
the New York Fed?
    Secretary Geithner. I did not sign a recusal agreement; I 
withdrew from day-to-day management, operations, and policies 
of the New York Fed, and my colleagues, both in Washington and 
in New York, can attest to that.
    Ms. Kaptur. So there was no formal agreement?
    Secretary Geithner. No. As I said in my testimony, what I 
did is I withdrew from--and this was very important to do. 
Again, no precedent for this, a sitting president of the New 
York Fed being nominated to be Secretary of the Treasury. And I 
withdrew from, after carefully consulting with my colleagues, 
from involvement in monetary policy decisions. I did not go to 
the FOMC meeting in December, and I withdrew from all decisions 
about the individual cases involving the financial system and 
from day-to-day management; and that was the right thing to do 
at that time.
    Ms. Kaptur. Thank you. Thank you for clarifying that.
    No. 2, a lot of people think that the president of the New 
York Fed works for the U.S. Government, but, in fact, you work 
for the private banks that elected you.
    Secretary Geithner. No, that is not true.
    Ms. Kaptur. Can you provide for the record the names of the 
handful of bankers on the board of the New York Fed that 
elected you in 2003?
    Secretary Geithner. That is a matter of public record and 
of course----
    Ms. Kaptur. It was 2003?
    Secretary Geithner. Of course we can do that.
    Ms. Kaptur. Thank you very much.
    Secretary Geithner. But, Congresswoman, can I just say what 
you said was not true. I work in the public interest. Officials 
of the Federal Reserve work for the public interest and they 
work for the government.
    Ms. Kaptur. But the people don't elect you. The heads of 
the Feds around the country don't elect you; it is the 
individuals who sit on the board of the New York Fed that elect 
you. Is that correct?
    Secretary Geithner. It is slightly more complicated than 
that. What the Congress did in setting up the Fed is set up a 
system where the presidents of the regional reserve banks are 
elected by their board, but it requires the approval of the 
chairman of the board of Governors in Washington for them to 
serve. So it is a delicate balance of checks and balances and 
Congress designed that system.
    Ms. Kaptur. But it is largely private banks that elected 
you, and I would like you to provide that for the record, 
    Secretary Geithner. Oh, absolutely. It is a matter of 
public record.
    Ms. Kaptur. The Cleveland Fed is not equal to the New York 
Fed, so I am very interested in your answer to the record.
    No. 3, Goldman Sachs was the largest domestic recipient of 
funds in this AIG counterparty arrangement. Let me ask you, now 
as Treasury Secretary, your chief of staff is the gatekeeper 
for access to you. Could you please provide his name?
    Secretary Geithner. His name is Mark Patterson.
    Ms. Kaptur. Thank you. And for whom did he work before you 
selected him as your chief of staff?
    Secretary Geithner. He worked for the President's 
transition team.
    Ms. Kaptur. No, before that. Which Wall Street firm did he 
work for?
    Secretary Geithner. And before that--again, this is a 
matter of public record and you know the answer to this 
question--he worked for Goldman Sachs.
    Ms. Kaptur. Thank you very much.
    Secretary Geithner. But----
    Ms. Kaptur. You answered my question, Mr. Secretary.
    Secretary Geithner. No, Congresswoman----
    Ms. Kaptur. Now, let me say this. The AIG transaction----
    Secretary Geithner. What you are doing is----
    Ms. Kaptur. You have answered the question. You have 
answered the question. Thank you. The AIG transaction was 
disturbing to many observers. Why did our Government not 
require the bank creditors to take the lead and bear some of 
the costs in any plan to stabilize AIG? You, in effect, 
nationalized the company and let the bank creditors off the 
hook. Why did you, as president of the New York Fed, not work 
out an arrangement to remove the London unit from the company 
rather than allowing the unit to infect the entire company?
    Secretary Geithner. If we had had the types of bankruptcy 
procedures we have for banks, it is possible that ultimately we 
could have done that. And if it would have been easy and 
cheaper for the taxpayer for us to separate the riskiest parts 
of the firm from the healthy, profitable insurance companies, 
we would do that; and, in fact, that is the core of the 
restructuring strategy the company is now undertaking. But that 
choice was not available to us at the time. If it had been 
possible, of course we would have done that. But because we did 
not have the tools that we have under bankruptcy, we did not 
have that choice.
    Ms. Kaptur. Thank you, Mr. Secretary. Your phone logs from 
the subpoenaed material this committee requested, which I would 
like to insert in the record, show between September 14th----
    Chairman Towns. Without objection, so ordered.
    [The information referred to follows:]

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    Ms. Kaptur [continuing]. November 26th--thank you, Mr. 
Chairman--the critical period when the bailout occurred, and 
just after September 15th, when the three major rating agencies 
downgraded AIG's credit rating, you made hundreds of calls, and 
the most, over 225, to Secretary Paulson, who was then 
Secretary of the Treasury. What firm did he work for prior to 
his appointment as Secretary of Treasury?
    Secretary Geithner. He worked for Goldman Sachs.
    Ms. Kaptur. He worked for Goldman Sachs. Now, Goldman 
Sachs, as I understand it, got the most in counterparty 
payments of any domestic institution, is that true, $14 
    Secretary Geithner. I actually don't know if that is true, 
but that is a matter of public record.
    Ms. Kaptur. Societe Generale got the most from an 
international firm, but Goldman Sachs was No. 1. Now, you made 
about 100 calls to Fed Chair Ben Bernanke, but then the next 
highest number of calls in that period, you made 103----
    Chairman Towns. The gentlewoman's time has expired.
    Ms. Kaptur --to a man named Dan Jester.
    Chairman Towns. Will the lady summarize?
    Ms. Kaptur. Mr. Chairman, may I just ask what firm did he 
work for?
    Secretary Geithner. As you know, he worked for Goldman 
    Ms. Kaptur. Thank you. And I will have additional questions 
with regard to who you phoned and we will place that in the 
record. Thank you.
    [The information referred to follows:]

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    Chairman Towns. Thank you very much.
    Secretary Geithner. Mr. Chairman, could I just say one 
thing in response to this? I just want to say--it is very 
    Congresswoman, you were suggesting that the people who were 
involved in this were not acting in the public interest, and 
you were suggesting that they were working for the private 
interest, not the public interest, and that is not true. I 
would never, and I believe none of those individuals would ever 
be part of any decision like that. And I think these people 
were people of enormous integrity and experience operating 
under exceptional circumstances, with no precedent, doing the 
best they could for what was in the public interest.
    Ms. Kaptur. Well----
    Secretary Geithner. And it is important to say for the 
    Chairman Towns. I must move. I must move. I must move.
    The gentleman from Georgia, Congressman Westmoreland.
    Mr. Westmoreland. Thank you, Mr. Chairman.
    Secretary Geithner, when did AIG--if you could just give us 
a date--when did AIG call and say we need some money?
    Secretary Geithner. Well, they came to Treasury and the Fed 
formally, I think, on that Friday, which was----
    Mr. Westmoreland. Friday the----
    Secretary Geithner. I think it was the--well, the calendar 
will show. It was the Friday in September, the 11th or the 
12th, I think.
    Mr. Westmoreland. OK. So it was a Friday in September? And 
at the time there were advisors of AIG that were also advising 
the New York Fed. Were you aware of any conflicts among these 
advisors or were there any discussions about what kind of 
conflict this might bring about?
    Secretary Geithner. Well, when AIG came to us and started 
to try to walk us through their financial condition, they had 
advisors with them and they were also in discussion with other 
advisors that were not with us in the room at that time.
    Mr. Westmoreland. When did that dollar amount become--after 
the discussions, at what point in time was a dollar amount 
derived at?
    Secretary Geithner. You mean the initial terms of the 
initial loan?
    Mr. Westmoreland. Yes, the initial----
    Secretary Geithner. I think we reached that decision 
probably just on the eve of the formal agreement.
    Mr. Westmoreland. OK.
    Secretary Geithner. I mean, again, we were trying to do----
    Mr. Westmoreland. And what would that date have been, do 
you remember that date?
    Secretary Geithner. Well, it would have been--you know, the 
16th was when we concluded this transaction, so it would have 
been just before that.
    Mr. Westmoreland. Let me ask. On the counterparties, when 
was that meeting with the counterparties to discuss what the 
payment might be to them, do you remember those dates?
    Secretary Geithner. I do not believe there was a meeting 
with counterparties. What I asked my colleagues to do, after 
looking at a range of options, is to approach the 
counterparties individually and try to negotiate concessions.
    Mr. Westmoreland. So there was no actual meeting where all 
the counterparties were in a room and----
    Secretary Geithner. I don't think--I would have to check 
the record. I would be happy to check the record and get back 
to you, but I do not believe that my colleagues at the New York 
Fed brought them in a room together.
    Mr. Westmoreland. So when you say your colleagues, these 
are people that actually worked for you, they were under your 
    Secretary Geithner. Absolutely. And they acted at my 
    Mr. Westmoreland. Yes, sir. So you were aware of the 100 
percent payment to the counterparties.
    Secretary Geithner. As I have said many times, we decided, 
and I fully supported, the decision to----
    Mr. Westmoreland. I understand. That is a yes, that you----
    Secretary Geithner. That is a yes. I am sorry.
    Mr. Westmoreland. OK. Now, in each one of these meetings 
with the counterparties to negotiate, we weren't able to 
negotiate any of them down?
    Secretary Geithner. Yes. I mean, I think it is the hardest 
    Mr. Westmoreland. I mean, there were separate meetings, I 
guess? I mean, did you question the negotiating skills of some 
of these people that----
    Secretary Geithner. No. These were--again, these were very 
talented people with a lot of experience who knew how to do 
this; many had done this for a living. But, again, unless you 
can threaten default or threaten to pay below par--you 
understand this--you don't have any leverage in the 
transaction. And, in fact, if we had negotiated with the threat 
of default like that, our concern was that would risk a 
downgrade and would have brought about the collapse of----
    Mr. Westmoreland. Do you know if AIG had approached any of 
these people about any type of negotiations about what a sum 
may have been? Because once the Government gets behind it, like 
you said, it takes way your negotiating skill.
    Secretary Geithner. You are exactly right. You are exactly 
right. And I am not sure, but I think, if I am not mistaken, 
AIG had probably tried to do that before, before the Government 
came in, but I can't speak to that today.
    Mr. Westmoreland. But these people with these credit 
default swaps, they were all bright people, they knew the high 
risk of what they were getting involved with, did they not?
    Secretary Geithner. Well, you know, the tragic lesson of 
this crisis is lots of bright people with lots of experience 
who should have known better made bets on the future of the 
country that assumed house prices would never fall, and the 
judgments AIG made were very similar to the mistakes the rating 
agencies made.
    Mr. Westmoreland. But these people were making a lot of 
money off of this. I mean, this was a high risk, high reward 
business, right?
    Secretary Geithner. Oh, you mean the people at AIG? Oh, 
yes, absolutely.
    Mr. Westmoreland. It is obvious that the AIG deal is a bad 
deal for the taxpayers. Is this deal being renegotiated and is 
anybody at the Treasury working with AIG to try to renegotiate 
this deal?
    Secretary Geithner. Congressman, it is a better deal for 
the taxpayer than the alternatives, and is proving, in many 
ways, far better than many of us thought, although, as I said, 
the U.S. Government is still exposed to substantial risk of 
loss. But we have a new board in place----
    Mr. Westmoreland. Just answer, because I have one more 
    Chairman Towns. No, the gentleman's time has expired and, 
of course, the gentleman from Maryland is recognized for 5 
    Mr. Van Hollen. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary, for your testimony.
    As you indicated, the previous administration came to 
Congress and to the country and said we faced an extraordinary 
circumstance, that failure to act to help rescue the financial 
industry would hurt people on Main Street, innocent bystanders 
in this process, and you took the action that you did and you 
have properly said that we need to learn the lessons from what 
happened, and the administration and the Congress are working 
to do just that.
    Here in the House, we already passed a Wall Street 
accountability bill to try to do two things: No. 1, provide the 
Fed and others with tools to make sure we don't have a 
situation where a firm becomes too big to fail in a manner that 
it hurts innocent people; second, to make sure that there is a 
failsafe, if somehow that happens, there is a pool of money 
raised from the banks, not from the taxpayers, to pay for the 
rescue; and, No. 3--and the President has proposed this--a fee 
on the biggest financial institutions, $50 billion plus in 
assets to recover every penny of TARP money. And I think it is 
important to understand, that everyone understands that 
includes every penny extended to AIG and every penny extended 
to the counterparties.
    Now, in the House we passed a bill and we had an amendment 
to that bill offered by Congressman Gary Peters of Michigan. I 
have it right here. And it says that fee will remain on the 
biggest banks not just to capitalize a fund to be used in the 
event of future problems that they have to pay for their own, 
but it says you keep that fee on until you recover every penny. 
And I must say I was surprised--I wish all our colleagues on 
the other side of the aisle were here--I was surprised that 
this very simple idea was rejected unanimously by the other 
side in a vote we had on this. And that vote would have 
ensured--it passed, but that was a vote to make sure that we 
get back every penny that the taxpayer gave to AIG, every penny 
that the taxpayer gave to the counterparties.
    So if you could just speak to the importance of making 
sure, No. 1, we take measures to prevent this from happening in 
the future, but, just as importantly, making sure we let 
everybody on Main Street know that their money that they helped 
send to rescue the package will be recovered if we adopt the 
proposal in the House and the President's proposal.
    Secretary Geithner. If Congress joins the President in 
adopting this proposed financial fee, then the American 
taxpayer will not be exposed to a penny of loss for everything 
the Government had to do to fix this mess in AIG or everywhere 
else. That is not enough, though. We believe it is very 
important to make sure we work with Congress to put in place 
constraints that will prevent this from happening again. It was 
a tragic failure of the country not to act sooner to limit 
risk-taking by some of the largest institutions in the world 
that were operating with not enough capital and no oversight, 
and we have to make it clear in the future that we are going to 
be able to let firms fail without costing the taxpayers money 
and without costing collateral damage.
    Now, Mr. Van Hollen, I just want to say one thing. The cost 
to the American people cannot be captured in the simple 
financial costs of the TARP. We will protect them from those 
costs if Congress passes this fee, but the costs of the crisis 
are much more damaging. It caused much more damage. It can 
never be captured by the accounting costs of the losses under 
TARP. But we have a great responsibility and obligation to 
reform the system so that they are not in that position again, 
and the least we can do to make sure that taxpayers aren't 
bearing the direct costs that we took in AIG, forced to take in 
AIG and elsewhere.
    Mr. Van Hollen. Obviously, the cost of some of these bad 
decisions obviously went beyond [remarks off microphone] that 
if we adopt the amendment the House has taken as a matter of 
final law, or the President's proposal, which is very similar, 
the moneys that have been the subject of the conversation today 
that the taxpayers attended to AIG and that went to the 
counterparties, will be fully recouped and returned to the Fed 
Treasury on behalf of the taxpayers.
    Secretary Geithner. That is exactly right. It is better 
than that, though, Congressman, because the specific 
transaction that is the subject of so much attention, 
appropriately, in this hearing, themselves are likely to earn 
the taxpayer a modest profit. The Government is still exposed 
to some risk of loss on the rest of its investments, but if we 
adopt this fee the taxpayers will not bear a penny of that 
    Mr. Van Hollen. Thank you, Mr. Secretary.
    Mr. Welch [presiding]. The Chair recognizes Mr. McHenry.
    Mr. McHenry. Just to be clear, there is $68 billion worth 
of loss, $30.4 billion associated with this AIG deal we are 
talking about now, so there is significant loss to the 
taxpayers already through TARP. So this new tax is simply about 
making up for that revenue.
    Mr. Secretary, do you support H.R. 4173, the Wall Street 
Reform and Consumer Protection Act?
    Secretary Geithner. Congressman, I am not sure of the 
precise legislative amendment you are citing. Can you describe 
the bill?
    Mr. McHenry. No, it is not an amendment, it is a bill 
sponsored by Barney Frank of Massachusetts.
    Secretary Geithner. Is this the comprehensive financial 
reform law that passed the House in December?
    Mr. McHenry. Yes.
    Secretary Geithner. Yes, I support that.
    Mr. McHenry. You support that. And do you support the 
Volcker rule?
    Secretary Geithner. Absolutely. What the President proposed 
is that working with the bill that passed the House, which 
included a provision that I think Mr. Kanjorski authored, to 
give the Government the ability to limit risk-taking by banks, 
that we make sure those translate into limits that will 
actually prevent risk-taking in the future.
    Mr. McHenry. So it is consistent with H.R. 4173?
    Secretary Geithner. Absolutely. That bill--and this is very 
important for people to understand. That bill included a 
    Mr. McHenry. I understand; I am on the committee.
    Secretary Geithner. Yes--included a provision that would 
give the Government the ability to limit risk-taking in a way 
to help prevent future crises.
    Mr. McHenry. Wasn't it your legislative staff that really 
worked to change the Kanjorski amendment?
    Secretary Geithner. Well, again, we worked closely with 
members of that committee on a whole range of those provisions 
to make sure that they met the intent----
    Mr. McHenry. No, you are not answering my question.
    Secretary Geithner. Oh, on that amendment? Absolutely we 
worked with them on that amendment.
    Mr. McHenry. You worked with them on that amendment----
    Secretary Geithner. But on alternate----
    Mr. McHenry [continuing]. To limit it in terms of its 
    Secretary Geithner. No. We worked on it to limit it to make 
sure that it was going to work.
    Mr. McHenry. OK, let's not--OK. So, in essence, the Volcker 
rule is something you support?
    Secretary Geithner. Yes.
    Mr. McHenry. OK. You testified last month before the Joint 
Economic Committee, ``I would not support reinstating Glass-
Steagall, and I don't actually believe that the end of Glass-
Steagall played a significant role in the cause of this 
crisis.'' Do you still stand by that statement?
    Secretary Geithner. Absolutely.
    Mr. McHenry. How do you reconcile that belief with this 
rule that, in essence, limits or forces banks to divest in 
hedge funds and private equity and all these other additional 
elements that is in essence Glass-Steagall?
    Secretary Geithner. Well, what Glass-Steagall did was to 
allow banks to underwrite equities and to engage in a whole 
range of other types of financial activities, insurance as 
    Mr. McHenry. It limited that ability, to be clear.
    Secretary Geithner. And we support, as I think the bill 
that you cited did support, it did actually provide authority 
to limit a set of activities so that the access to the safety 
net is not subsidizing excessive risk-taking. It is a simple 
principle. Does it dial back some of the Graham-Leach power 
reforms? It does do that.
    Mr. McHenry. OK. So----
    Secretary Geithner. But it is not what people typically 
referred to as Glass-Steagall.
    Mr. McHenry. OK, so it also says that if you engage in a 
certain type of--if you have a certain form, meaning a bank 
holding company, you have to adhere to certain rules, correct?
    Secretary Geithner. That is right.
    Mr. McHenry. OK. You also testified before the Financial 
Services Committee, of which I sit, last year that ``Financial 
products and institutions should be regulated by the economic 
function they provide and the risks they present, not the legal 
form they take.''
    Secretary Geithner. That is right, I agree with that.
    Mr. McHenry. And so you support a rule that says, based on 
a legal form you take, you have to adhere to these principles. 
How do you reconcile this?
    Secretary Geithner. They are perfectly consistent, but let 
me state the basic principle again.
    Mr. McHenry. They are perfectly opposites.
    Secretary Geithner. No. What we are saying is--and this is 
very important for people to understand. If you are operating 
in the financial markets, you are helping companies raise 
credit, raise capital, you are helping make markets work, you 
are providing liquidity to markets, it doesn't matter, it 
shouldn't matter to us or the American people whether you are 
called Goldman Sachs or whether you are called JP Morgan. You 
should be subjected to a set of constraints on capital, on 
leverage and how you are funded that limit the amount of risks 
you take.
    If, in addition to that, you want to own a bank and operate 
a bank, then there are a set of other limits that we think are 
good in the public interest so that, again, you can't take 
advantage of that access to the safety net to subsidize a set 
of activities that are not essential to----
    Mr. McHenry. But basically you are saying, if you just 
simply drop the bank holding company label, you are out from 
under this regulation.
    Secretary Geithner. Absolutely not. And that would be a 
mistake for the country. Our view is----
    Mr. McHenry. That is actually what the one-page rule----
    Secretary Geithner. No, it does not do that. That is not a 
fair reading of the rule. But, Congressman, maybe this would be 
helpful for me to say to you. We will work very closely with 
Members on both sides of the aisle to make sure that this 
legislation results in a set of sensible constraints in risk-
    Mr. McHenry. That would be something new----
    Mr. Welch. The gentleman's time has expired.
    Mr. McHenry [continuing]. Over the last 13 months, because 
you have not reached out to Republicans, to be clear, on the 
Financial Services Committee.
    Secretary Geithner. That is not true, but, again, I am 
happy, going forward, to make sure that, as we try to give 
these force of law, reflect them in regulation, we do so 
carefully, with full consultation.
    Mr. Welch. The gentleman's time has expired and the 
chairman recognizes himself for 5 minutes.
    Thank you, Mr. Geithner, for being here. No. 1, I just want 
to remind my colleagues on both sides that the whole request 
for the bailout that had to be administered by the Treasury 
Department was at the request of then President Bush. And, 
second, I understand your testimony that the people responsible 
for administering this made the best decisions they could under 
the circumstances.
    I just want to ask a couple of questions, though, that 
start with one of the statements you made, Mr. Geithner, about 
the effect of the actions taken has stabilized the financial 
system. I am not here to argue that. The question I have is has 
it helped the broad Main Street economy. And there are many who 
believe, and I am among them, that Wall Street got out ahead of 
itself, got in the business of self-enrichment rather than 
financing American jobs, American entrepreneurs, and actually 
transformed itself from an entity that was about creating jobs 
into the greatest job killing machine in the history of the 
    There are two things that I want to ask. One is the bank 
fee that President Obama has endorsed, you see that as 
essential to have the folks who were largely responsible for 
the financial meltdown pay the cost so that it is not the 
taxpayers, is that correct?
    Secretary Geithner. Absolutely. In the reforms we proposed 
to the Congress back in June, at the center of that proposal 
was a basic principle which, in the future, governments exposed 
to risk of loss, the banks pay. In the TARP legislation you 
referred to, there is an explicit provision there that puts an 
obligation on me to propose ways to recoup the costs, and we 
propose that in the President's financial responsibility bill.
    Mr. Welch. All right, thank you. And I support that; I am 
glad you are doing it.
    Second, there are a number of us, well over 60, that are 
supporting a tax on Wall Street bonuses, and I just want to get 
your opinion on this; and I will give an example of the kind of 
conduct that was allowed to occur. It has been reported, as you 
know, in the New York Times that Goldman Sachs had a department 
that bundled subprime mortgages. It then had folks who 
advocated to the rating agencies to give it the highest rating 
possible. It then went to its trusted clients and sold those, 
and then it went to its trading desk and sold them short.
    Is that the type of conduct that you think should be 
monitored and curbed by any financial regulatory monitor?
    Secretary Geithner. Congressman, I believe deeply that we 
need tougher rules, enforced more effectively and evenly to 
make sure that consumers and investors are not taken advantage 
of, and the system is not so fragile the Government has to step 
in in the future and take this enormous risk of loss. I deeply 
believe that.
    Mr. Welch. Let me get to--let me just ask you about the 
bonus tax, because I would be interested in this. Firms like 
Goldman received TARP funds. They received low interest money 
from the open window of the Federal Reserve and, of course, 
Goldman and other firms received direct pass-through payments 
when AIG was bailed out, correct?
    And when Mr. Paulson, your predecessor, was on the phone 
requesting this money--this was not anything that you made the 
request for--he assured us that Wall Street had learned its 
ways. Goldman and the other Wall Street firms are back to their 
old ways; they have been so successful--and let's give them 
credit, they are good at what they do. The question is whether 
what they do is good for the economy and for Main Street. They 
have been able to set aside $140 billion to $160 billion for 
bonuses. And they could have lent that out, they could have 
added to their capital base, and the third choice was they 
could put it in their pockets, which is the one they have 
    Do you think, in view of the fact that much of their profit 
was made through taxpayer generosity, it would be appropriate 
to tax bonuses, as I suggest in my legislation, at 50 percent 
above $50,000?
    Secretary Geithner. Congressman, of course I would be happy 
to take a careful look at that legislation and talk to you 
about how best to deal with that. The basic principle that we 
support fully is to make sure that the American taxpayer is not 
exposed to a penny of losses from the actions the Government 
had to take under the TARP authority; and I completely agree, 
as I said earlier, that we need to work with the Congress to 
make sure we bring about fundamental changes in how bankers are 
paid so that they are not taking risks that could imperil the 
economy as a whole. Doing that is hard to do right. We have 
tried in the past, not very successfully. It is an obligation 
that the shareholders have and boards have too, but it is the 
Government's responsibility in the end to make sure----
    Mr. Welch. My time is almost up. We would take the money 
that was raised from that and put it into small business 
lending, and, as you know, the big banks that received TARP 
funds have reduced lending to American enterprise. Folks in 
Vermont who run businesses ask me, if those guys make so much 
money, how come they can't lend me any?
    Secretary Geithner. I agree. And I think if you saw the 
paper today, we are close to proposing to the Congress that we 
take a large amount of the resources that we have gotten back 
from banks, from the large banks, and devote them to exactly 
that objective, trying to make sure that small banks and small 
businesses have access to credit.
    Mr. Welch. Thank you, Mr. Secretary. My time is up.
    The Chair now recognizes the gentleman from Ohio, Mr. 
    Mr. Jordan. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary, for being with us today. Now, Mr. 
Secretary, you were involved--you have said this many times--
involved with the decision 15, 18 months ago relative to the 
initial TARP bailout. You were involved in all that; you 
thought it was the right decision to make at the time, coming 
to Congress, asking for the $700 billion?
    Secretary Geithner. Oh, I thought it was absolutely 
essential at that point. The country had no choice.
    Mr. Jordan. And this committee has had several hearings on 
the Bank of America and Merrill Lynch, and you were involved in 
that decision. We have emails that talked about you were in the 
loop, you knew what was going on there; you were supportive of 
what took place with the merger of--with the acquisition of 
Merrill by Bank of America. Yes or no?
    Secretary Geithner. Well, that is right that, at that time, 
I was part of an effort to try to find the solution, private 
solution to Merrill Lynch at that point, and I thought that 
action at the time was necessary and appropriate, yes.
    Mr. Jordan. And today you have said that you think the 
initial decision relative to AIG and the payment to the 
counterparties, you think that was appropriate. You stated that 
strongly in your written testimony. You talk about this is in 
the best interest of the American people.
    Secretary Geithner. I do. I do.
    Mr. Jordan. We did not act to help form banks, we acted 
because the consequences of failing at that time, in those 
circumstances, would have been catastrophic to our economy, 
American families, and American businesses. You think it was 
definitely the right decision?
    Secretary Geithner. I do.
    Mr. Jordan. And the staff that worked for you at the New 
York Fed would be in agreement with that analysis, that this 
was so critical, this had to get done, the sky was going to 
fall, the world was going to end if we did not do what you 
decided to do relative to the counterparties and the $62 
billion that was spent, is that correct?
    Secretary Geithner. I believe it is. But I think it would 
be fair to say there were those among us involved in this in 
each of the industries involved--Washington, New York 
Treasury--who were deeply troubled by that choice, were not 
comfortable with this----
    Mr. Jordan. Were not comfortable with it, but you thought 
it was what you had to do at the time.
    Secretary Geithner. I believe that, yes.
    Mr. Jordan. And it was so important, as you have said in 
your written and your testimony here this morning, your oral 
testimony, that, you know, this was critical to American 
families, American businesses.
    Secretary Geithner. I believe that.
    Mr. Jordan. So it begs the obvious question: Why the 
secrecy relative to disclosure? If it is that important, $62 
billion, why in the heck not disclose it when it is happening, 
since you have subsequently done that? Why the secrecy? And, 
frankly, why weren't you--if it is that critical, if it is that 
important, why in the heck did you recuse yourself? Why weren't 
you involved?
    Secretary Geithner. Well, again, just to step back a 
second, when the Fed disclosed this in March 2009, I thought it 
was the right thing to do, and I think reasonable people, 
looking back at this, could say why wasn't that possible 
sooner. I think that is a reasonable question----
    Mr. Jordan. Why wasn't it possible in November when it was 
all going down?
    Secretary Geithner. Right. But all I can say is what I 
understand and was involved in, and I was not involved in 
discussions about decisions about what to do with that 
particular transaction, the counterparties, or the details. And 
that is because of decisions----
    Mr. Jordan. Let me ask you this. Do you believe the 
decision that was made by the folks who worked for you at the 
New York Fed to not disclose until March and not disclose when 
it was all taking place, do you support that decision?
    Secretary Geithner. Congressman, I, as I said----
    Mr. Jordan. It is a yes or no. I mean, you have said you 
are transparency; you said this was so critical, the world was 
going to end, everything was going to go to----
    Secretary Geithner. Let me tell you something I----
    Mr. Jordan. Why not?
    Secretary Geithner. Let me tell you something I deeply 
believe, OK? It is very hard to put yourself in shoes you did 
not occupy and have really a fair sense to evaluate those 
actions in that case. And I don't feel like I can put myself in 
their shoes at that time.
    Mr. Jordan. Let me tell you what I think happened.
    Secretary Geithner. But I do believe that they acted with 
great integrity, care, and judgment after----
    Mr. Jordan. Here is what happened. Here is what happened. 
Mr. Lynch was on the right trail over here. I mean, this is a 
pattern, we have seen it. You came to the Congress of the 
United States, you said give us $700 billion of taxpayer money.
    Secretary Geithner. I did not do that.
    Mr. Jordan. I am saying the Government. The Government came 
to the Congress, give us----
    Secretary Geithner. Your Government, your President at that 
    Mr. Jordan. I understand. I didn't say Democrat or 
Republican. I understand the Government. Give us the money, we 
are going to go buy the troubled assets. They didn't do that. 
Nine days later, 10 days later, as Mr. Lynch pointed out, you 
were in the room when they told the nine biggest banks we are 
not going to buy the troubled assets, you are going to take the 
TARP money.
    Secretary Geithner. I was, and that was one of the best 
decisions, one of the most important decisions that----
    Mr. Jordan. But understand the pattern. The Congress of the 
United States was told one thing; 10 days later an entirely 
different action was taking place.
    Secretary Geithner. I don't think that is actually correct. 
What the Congress authorized was the billions----
    Mr. Jordan. You don't think the Congress passed that bill 
because they understood that the money that the taxpayers were 
going to put up was going to be used to buy troubled assets?
    Secretary Geithner. Well, as I said, I can't put myself in 
your shoes, but I think the salient point is that the authority 
that President Bush asked for gave my predecessor the authority 
to put capital in banks, and doing that----
    Mr. Jordan. Here is the pattern, Mr. Geithner. Mr. 
Secretary, here is the pattern. The Government comes to the 
taxpayer, says we need more of your money, we need a boatload 
of your money, the world is going to end; we want it for a 
specific purpose; then they do it for something else. Then they 
come to the taxpayers and say we need more of your money and we 
are going to use $62 billion and they don't disclose to the 
taxpayer what is going on. This is why we never should have 
traveled down this road, this unprecedented involvement by the 
Government in the private sector. We have seen it----
    Mr. Welch. The gentleman's time has expired.
    Mr. Jordan. We have seen it with Bank of America and 
Merrill Lynch, we have seen it now with AIG.
    I thank the chairman.
    Mr. Welch. The gentleman's time has expired. Thank you.
    The Chair recognizes Mr. Clay.
    Mr. Clay. Thank you so much, Mr. Chairman. I want to thank 
Chairman Towns and Mr. Issa for conducting this hearing.
    Secretary Geithner, several economists and policymakers 
assert that AIG's ability to provide cash collateral to their 
counterparties was not relevant in designing their assistance 
package. What is your opinion on this claim that it was not 
relevant in designing the assistance?
    Secretary Geithner. I agree with that. What was relevant 
and necessary was how to restructure this firm in ways to 
protect the taxpayer, to the extent we could, from the risk of 
greater losses, and our choice was at this point this very 
stark, tragic choice, which is to let AIG default or not. And 
we thought that default itself would have been much more 
    Mr. Clay. OK, help me and help the American people 
understand. Why was AIG's ability to make payments to its 
counterparties for their toxic assets even a factor in 
determining the amount of bailout money to award them?
    Secretary Geithner. For an insurance company or any 
financial institution to operate, they need to be able to 
operate with a high credit rating. Without that, they could not 
borrow money to function. They could not write insurance 
contracts because people would not believe they would have the 
financial wherewithal to back those commitments.
    So the rating is critical. If we were to have defaulted on 
any of those legal contracts, AIG would have been downgraded. 
The counterparties would have the right to take more money and 
to default on and to bring about the basic collapse of the 
firm. So it is that stark, tragic choice. If AIG had not paid, 
they would have lost the rating and the firm would have 
collapsed. If we had continued to lend them money for them to 
make those payments, the rating would have also been in 
jeopardy, because AIG already had a lot of debt at that point. 
So the choice was, again, to restructure them so that we 
limited the drain of cash and left the taxpayer with any 
potential positive return on those underlying securities.
    Mr. Clay. So you are saying that the counterparties would 
have had a right, through bankruptcy----
    Secretary Geithner. A legal right to sue to recoup that 
    Mr. Clay. OK. Did anyone involved in the concession 
negotiations ever suggest that AIG's counterparties should not 
be relevant in their bailout package? Did that issue ever arise 
among the negotiations or anyone that you encountered during 
the negotiations?
    Secretary Geithner. That is a complicated question, good 
question, but as I tried to explain in the testimony, what we 
were guided by, what was going to be the best way at least cost 
to prevent default and protect the system, and the entire 
system was at stake then, and no firm in the country would have 
been insulated fully from the collapse of the entire American 
financial system, and our judgment was that AIG's default would 
have materially raised the probability of that broader 
collapse. So, again, our choices were terrible choices, but 
they came down to what was the best way to prevent that outcome 
on the best terms for the taxpayer.
    Mr. Clay. OK, so then that gets to the point of being too 
big to fail. AIG's tentacles were that widespread throughout 
the country and the world that----
    Secretary Geithner. It is exactly the right question. There 
are two things that mattered in this case. One is you had a set 
of firms like AIG, huge, risky, spread everywhere, involved in 
a whole range of things, and you had a world that was burning. 
So, again, the first time since the Great Depression, you had 
financial systems around the world really at the brink of 
stopping in their tracks.
    And it is those two conditions that are most risky. If the 
world had been stable, everything had been fine, we weren't on 
the edge of the worst recession in generations, then we could 
have afforded to be completely indifferent to the fate of AIG 
or all those institutions. But because AIG was so large and so 
interconnected, and because the system was so fragile, it would 
have been irresponsible to take the risk, the failure would 
have dramatically amplified the pressures that we are still 
living with today.
    Mr. Clay. Could you help describe what the reaction was in 
negotiations to the counterparties, pros and cons, as far as, 
you know, paying counterparties?
    Secretary Geithner. Again, we wrestled with lots of 
choices, as I tried to explain in my written testimony. We 
thought about whether it was better to default, to impose a 
haircut, to negotiate concessions under the threat of default. 
We thought about keep paying and watching that money keep 
running out the door, with the counterparties still holding the 
underlying assets.
    We thought about negotiating over time, trying to stretch 
it out, see if we could find a better way to solve that 
problem. None of those options were realistic; none of them 
were feasible. They were not better than the choice we chose. 
And, again, I think if you look back and you take a fair 
reading of this, although the Government is still exposed to 
substantial risk of loss, those losses are much lower today 
because of the actions we took in AIG, and this transaction, 
which, again, people are so understandably concerned about, has 
put the taxpayer in a better position than if simply we kept 
making those payments or if we defaulted on them.
    Mr. Clay. Thank you, Mr. Secretary, for your responses.
    Chairman Towns. The gentleman's time has expired.
    I now yield 5 minutes to the gentleman from California, 
Congressman Bilbray.
    Mr. Bilbray. Thank you.
    Mr. Secretary, we are supposed to do oversight and reform, 
so we are trying to get the information so that we can do the 
reform to make sure the next time this process comes up we have 
procedures and laws that address this. So it is real important 
that we identify how this went so we can try to correct it and 
make sure it doesn't happen again. Not only in March you knew 
that there was a so-called disclosure issue, but in February 
you had said, in a speech, that one of the major issues that 
you were concerned about is the lack of disclosure that was 
causing the American people not to trust the system.
    Now, I think we all agree that in layman's terms, with the 
average citizen, when they heard disclosure issue, they hear 
cover-up. Now, why, in a system that is supposed to be open--
the American people have a right to know where their money 
goes. Why was there even a disclosure issue? Why were we even 
discussing the so-called cover-up of the $160 billion, where it 
was going, in this process?
    Why was that even an issue that as soon as you knew that 
there was a problem there, that somebody didn't clarify this? 
Was that your staff had basically did not inform you that there 
had been this cover-up, this disclosure issue, and did you make 
that decision or was that decision made outside? Because AIG 
sent the information over; it was an internal process within 
the Government itself that said we are not going to disclose to 
the public this information.
    Secretary Geithner. My colleagues at the New York Fed I 
think have put in the public domain a very thoughtful 
explanation of the judgments they wrestled with and ultimately 
reached, and I know, and I am confident, that their colleagues 
in Washington spent a huge amount of time throughout those 
months trying to wrestle with how to meet the understandable 
public interest in greater disclosure of these things, and they 
ultimately, I think appropriately, came to the decision that 
they could and should put that information in the public 
    Now, you are exactly right, I have been a great proponent 
of greater transparency, and the centerpiece of the strategy 
that we adopted to fix this mess in the financial system was to 
force the largest banks in the country to disclose for the 
first time to the public, to all investors, the scale of losses 
they might face in the event this recession was much more 
damaging than it proved to be, and that provided the basis for 
private investors judging who was strong, who was less strong, 
and deciding to put capital into those institutions.
    Mr. Bilbray. In other words, did your staff know the cover-
up was there, a disclosure issue was there before you knew it 
was there? Was the decision to----
    Secretary Geithner. Again, I don't--I think, again, as the 
record the committee has already put in shows, there were 
discussions that were happening about what to disclose when 
throughout that period of time, but----
    Mr. Bilbray. Were you involved in those discussions?
    Secretary Geithner. As I said in my thing, I will say it 
again, I played no role in decisions about what to disclose 
about these transactions to these individual counterparties.
    Mr. Bilbray. Did your staff make the decision not to inform 
you or include you in that decisionmaking process?
    Secretary Geithner. Yes, they did, although I made the 
    Mr. Bilbray. Would you want to know about that or would you 
prefer that you didn't know about it at the time?
    Secretary Geithner. I think, in retrospect, I wish I had 
known, frankly. But after November 24th I appropriately removed 
myself from decisions about a whole range of policy issues the 
Fed was dealing with. But the people that were making those 
decisions, in close consultation with people in Washington and 
with legal counsel, are people of great judgment, enormous 
integrity, and I have enormous trust and confidence not just in 
their judgment, but in the quality of the decisions they made 
throughout that period of time.
    Mr. Bilbray. Do you feel today that at the time that they 
made the decision to do the cover-up, the disclosure issue, 
that they felt you did not want to know about it at the time? 
Do you think they made a decision that----
    Secretary Geithner. I do not--in my entire time there, I 
was never aware of a situation in which my colleagues sought to 
shield me from something consequential. I was president of the 
New York Fed; I was going to be accountable for decisions made 
on my watch. But after the 24th, for reasons that I think are 
fair and right for the institution, I could no longer run those 
day-to-day judgments, and I withdrew from those and I think 
those were necessary. Now----
    Mr. Bilbray. And your staff decided to shield you from the 
cover-up side of it too?
    Secretary Geithner. No, no. I decided that I would withdraw 
myself from--I didn't decide this alone, I decided this in 
consultation with the chairman of the board of Governors of the 
Federal Reserve System and with the incoming administration to 
protect the institution from the unique condition I was in 
    Mr. Bilbray. Mr. Secretary, what date did you know that 
there was a cover-up, a disclosure issue? When were you 
    Secretary Geithner. I only knew about these discussions 
about disclosure when they started to be in the public domain. 
I actually don't know when they first rose to the attention of 
the Congress, but when they rose to the attention of the 
Congress and they were in the press, then I was aware of it.
    Chairman Towns. The gentleman's time has expired.
    Mr. Bilbray. Thank you very much.
    Chairman Towns. Let me thank you, Secretary Geithner, for 
your testimony and, of course, we will now----
    Mr. Issa. Mr. Chairman, I would ask unanimous consent that 
all Members be allowed to put their questions in writing to the 
Secretary and would ask that the Secretary, if he would respond 
to them in writing, since so many Members have not been able to 
ask their questions.
    Chairman Towns. Without objection, so ordered.
    Thank you, Mr. Chairman.
    Mr. Chaffetz. Mr. Chairman, I am not sure what the right 
point of order here is, but I recognize how tremendously busy 
the Secretary is, but I also recognize the need for this 
Congress and people on both sides of the aisle to be able to 
ask some questions. We have been waiting patiently here all 
day. I would hope that the chairman would----
    Chairman Towns. Let me just say what the problem is. I am 
one--as you know, you have been here long enough now to really 
know me--who believes in openness and I believe in going as 
long as it takes. But Mr. Paulson has a problem with his 
schedule in terms of the amount of time that he would be 
    If we continue, then he will not be able to testify. That 
is the issue that we have to deal with. So, that is the reason 
why we are cutting it, and it was agreed that this would 
happen. And, of course, I understand there are several people 
that did not have an opportunity to raise questions, but what I 
would suggest is that you put the questions to the Secretary in 
writing and he will answer, because, if not, then the second 
witness we will not be able to hear from at all, and I think 
that would be----
    Mr. Chaffetz. Mr. Chairman, if I could be so bold, my guess 
is, if we were to survey or talk to the people on the panel, 
particularly people who haven't had a chance to ask questions, 
I think, with all due respect, we would much rather hear from 
the current Treasury Secretary than the past Treasury 
Secretary, whose schedule is probably a little bit more 
flexible than the current Treasury Secretary.
    Chairman Towns. I understand that, but the point of the 
matter is that we have a hearing that has been scheduled and, 
of course, has been structured. I wish we could stay here and 
allow everybody to do that, but the point is that I think in 
this situation----
    Mr. Chaffetz. Mr. Chairman.
    Chairman Towns. I would be delighted to yield to the 
gentleman again, yes.
    Mr. Chaffetz. And I appreciate it, because you have always 
been so fair and very generous, and personally very good to me. 
Is there a way that we could vote on which direction to go on 
    Chairman Towns. Well, you know, it is actually up to the 
chairman, but let me say what I would like to do. I would give 
a minute to two on this side and a minute to two on this side, 
and that is it. I mean, we have to move forward. We have a 
scheduled hearing that is here looking for certain 
    Mr. Kucinich. Would the gentleman yield?
    Chairman Towns [continuing]. Looking for certain 
information. In order to get the information, we need to talk 
to the present Secretary, we need to talk to the past, and, of 
course, we have others that we still want to----
    Mr. Kucinich. Would the gentleman yield?
    Mr. Fortenberry. Mr. Chairman, I join with you in that 
unanimous consent for 2 additional minutes per side equally 
    Mr. Kucinich. Reserving the right to object. Mr. Chairman, 
I just want to say that any member of this committee has the 
ability to submit questions in writing. Mr. Geithner, in 
response to an earlier question, said that, in the interest of 
time, that he would be willing to answer questions in writing. 
Is that not true, Mr. Geithner?
    Secretary Geithner. Absolutely. Of course.
    Mr. Kucinich. OK. So, Mr. Chairman, anybody who wouldn't 
get a chance to ask a question here can still put it in 
writing. I withdraw any objection.
    Chairman Towns. Let me just say that we will go two on this 
side, two on that side, but a minute, remember.
    Mr. Fortenberry. Mr. Chairman, reserving the right to 
    Chairman Towns. I don't know what you are objecting to.
    Mr. Fortenberry. If you would recognize me. The unanimous 
consent request for 2 minutes each. I would be happy, Mr. 
Chairman, to forego my time with Secretary Paulson to ask 
Secretary Geithner----
    Chairman Towns. Well, I wish we could operate that way, 
but, you know, when you have hearings that are structured, they 
are not structured in the fact that someone would give up their 
time. I mean, that is not the way we do it. So the point of the 
matter is that we either accept the 2-minutes on each side or 
we move forward. OK? So that is what is on the table--2 minutes 
on this side, 2 minutes on that side.
    Mr. Fortenberry. I withdraw my objection.
    Chairman Towns. Designate the two on this side.
    Mr. Connolly, you have a minute to raise one question with 
the Secretary. Mr. Connolly from Virginia.
    Mr. Connolly. Thank you, Mr. Chairman.
    Chairman Towns. Recognized for 1 minute.
    Mr. Connolly. Thank you, Mr. Chairman.
    Mr. Geithner, we only have 1 minute. One has the sense that 
some people in this room perhaps want to rewrite history, and I 
understand, given the history, why they might want to do that. 
In your opening statement you talked about the need for 
financial regulatory reform. Could you expand on why we need 
that, particularly when it comes to regulating that which was 
resisted from regulation in the past, like derivatives and 
credit default swaps?
    Secretary Geithner. I don't think it is a hard case to 
make. I think you just have to look at the wreckage caused by 
the crisis to say the system failed dramatically. And, again, 
the two most simple failures that happened is people were 
allowed to take risk without constraints. We let a system 
operate where institutions that were huge and consequential 
operated with no adult supervision, with no constraints, and 
they brought the country to the edge of collapse.
    Let me just say one thing in common with the following 
firms. Fannie and Freddie, the largest investment banks in the 
country; AIG, a set of specialized insurance companies, a whole 
range of consumer finance companies, a bunch of thrifts. They 
all had one thing in common, which is they were not subject to 
a set of sensible rules to constrain the risks they could take.
    What we propose in financial reform is to change that. It 
is a simple imperative. That is not enough though, because 
people will make mistakes in the future. So we need to make 
sure, when they make those mistakes, that we can let them fail 
and failure can happen without catastrophic damage. We need to 
be able to contain the damage, isolate it, draw a line around 
it, put them out of their misery, put them out of existence 
without the taxpayer being exposed; and we need to make sure 
that we don't have a system where the taxpayer is exposed to 
the risk of loss or that investors and creditors live with the 
expectation the Government will be there again.
    And, again, that is something that I think we all have a 
huge obligation and responsibility. It was the laws of the land 
that allowed that to happen, the laws of the land that made it 
impossible for the Government to act, and I think we need to 
work together to change that.
    Mr. Connolly. I thank the gentleman and I thank the 
chairman for his consideration.
    Chairman Towns. Thank you very much.
    I now recognize Mr. Fortenberry for 1 minute.
    Mr. Fortenberry. Thank you, Mr. Chairman.
    Mr. Secretary, welcome. For the last year and a half we 
have been privatizing profits and socializing risk, and if the 
optics on the AIG aren't bad enough, the counterparties to the 
AIG, who received 100 parity for their liabilities, 7 of the 
top 10 are foreign firms. Societe Generale was the top 
recipient of $16.5 billion of American taxpayer bailouts, in 
effect, followed by Goldman Sachs.
    Now, you said this economy is in crisis. This year, Goldman 
Sachs will give $16 billion of bonus payments, about $500,000 
per employee. This is really difficult to understand why there 
wasn't, at first, a desire to have transparency in regards to 
counterparty transactions. Would you address that, please?
    Secretary Geithner. Oh, I am not sure if you were here for 
that part of the conversation.
    Mr. Fortenberry. I have been here the entire time.
    Secretary Geithner. OK.
    Mr. Fortenberry. Except for votes.
    Secretary Geithner. But, again, the actions we took were 
necessary in the public interest, better than the alternatives, 
to help prevent catastrophic damage. And if you are outraged, 
as I think you should be, about how the economy and our system 
was in this mess, I hope you will join with us in trying to 
work to make sure it doesn't happen in the future. This is not 
something that should be Republican or Democrat.
    There is a deep, I think moral, obligation we have to try 
to make sure that we put in place reforms that will prevent 
this from happening again. If the Government had done that 
sooner, this would have been less damaging. And a critical part 
of the failure was we ran a country, largest economy in the 
world, largest financial system in the world, without having 
the kind of bankruptcy type powers we had for banks for 
decades. And that is something that----
    Mr. Fortenberry. Let's try to do that on a bipartisan 
basis, sir, please. But you understand why----
    Chairman Towns. I am sorry, the gentleman's time has 
    Now I recognize the gentleman from Illinois, Congressman 
Davis, for 1 minute.
    Mr. Davis. Thank you very much, Mr. Chairman.
    Thank you, Mr. Secretary. Let me just ask if you had to do 
it again, to do it all over, would you change any of the 
decisions that you made in the fall of 2008 to rescue AIG and 
pay the counterparties par?
    Secretary Geithner. Congressman, again, I think about this 
a lot, and one of the great strengths of our country is, again, 
people have to look back and come to their own judgment whether 
we made the best choices. But I am very confident that we made 
the best of a set of terrible choices; that there were no 
better alternatives. We did not have the option of bankruptcy; 
we did not have the option of defaults; we did not have the 
option of selective haircuts. It would have been catastrophic 
to let the institution fail. We didn't rescue AIG; we 
intervened so that we could dismember it safely, without it 
wrecking the country and the system.
    I think the big mistakes we made as a country, and they are 
mistakes that we have to reflect on deeply for a long time, 
were why the Government didn't act sooner to limit risk-taking, 
why the Government didn't provide competent authorities the 
ability to contain risk-taking, and why didn't we have in place 
the kind of tools we have had for a long time for banks to try 
to deal with these kinds of failures. I think those were tragic 
    The lesson of financial crises is if you don't act sooner, 
things get to the point where they can cause catastrophic 
damage; and if you let it, if you stand back and hope it will 
burn itself out, correct itself, it will be a good, healthy 
adjustment for the economy, that can cause enormous damage, and 
it will cause enormous damage not just to the American lives 
and people will be living with for a long time, but to the 
revenue base of the country, deeply impairs the capacity for 
Government to do things that are necessary like we need 
resources for, protect national security, make sure teachers 
can be in the schools. These things are deeply connected. If 
you stand back and try to hope the market will fix itself, you 
court catastrophe. I hope we learned that lesson. It should 
never happen again.
    Chairman Towns. Thank you very much. The gentleman's time 
has expired.
    I now recognize the gentleman from Utah, Mr. Chaffetz.
    Mr. Chaffetz. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary. I was going to ask about the 18 
phone calls you made to Rahm Emanuel, more than any other 
Member of Congress, but we will have to save that for another 
day. What I would like to ask you about is this idea that they 
are going to make profits. I am going to read two statements 
and ask you a question, from Neil Barofsky's testimony that is 
coming up.
    First one is, on page 13, ``Treasury's own TARP financial 
statement estimates that Treasury will not be made whole, but 
is rather projected to lose more than $30 billion on its AIG 
    Second quote, later in the same paragraph, ``Narrowly 
asserting that taxpayers will be ``made whole'' on Maiden Lane 
III--just one part of the AIG counterparty transactions--
without mentioning the huge losses Treasury expects to suffer 
on other, inextricably linked parts of the very same 
transactions is simply unacceptable; the American people 
deserve better.''
    So my question, and I am hoping that you can respond to 
those two statements, is when you refer to profits from the AIG 
counterparty bailout, are you counting the cost of the $35 
billion in cash AIG handed over to the counterparties or just 
the $27 billion they got directly from the New York Fed?
    Secretary Geithner. Congressman, I think that Mr. Barofsky 
and I actually agree on this, and I said in my statement--I was 
very clear--the Government is still exposed to substantial risk 
of loss on its investments in AIG. The Federal Reserve in this 
transaction, I think more generally, is unlikely to face any 
loss. That is a good thing. We should welcome that.
    But the Government is still exposed to risk of loss. We 
don't know how large those losses will be. What we refer to is 
not a projection, it is just an estimate based on current 
market prices. But the really important thing--and I hope you 
will join us in this--is if we adopt this financial 
responsibility fee, the taxpayer will not bear a penny of the 
burden for what we did----
    Mr. Chaffetz. Sounds like a tax to me. It doesn't sound----
    Secretary Geithner [continuing]. Under the TARP.
    Mr. Chaffetz. Sounds like a tax to me.
    Secretary Geithner. Well, you can call it what you want, 
but what it is is a principal.
    Mr. Chaffetz. I call it a tax, and I wish you would too. I 
call it what it is.
    Secretary Geithner. Well, again, in the law that Congress 
passed authorizing these actions, Congress required the 
Secretary of the Treasury to propose a way to make sure 
taxpayers are held harmless. We did that. I hope you will join 
us in supporting that because there is no reason why the 
American taxpayer should be exposed to a penny of loss in what 
we did in AIG. We can make that possible.
    Chairman Towns. The gentleman's time has expired.
    Thank you very much for your testimony, Mr. Secretary, and, 
of course, you may be excused.
    Now we call upon our second panel.
    Chairman Towns. The second witness for today's hearing is 
former Treasury Secretary under the Bush administration, 
Secretary Henry Paulson.
    Mr. Paulson, please stand as I administer the oath.
    [Witness sworn.]
    Chairman Towns. You may be seated.
    Let the record reflect that he answered in the affirmative.
    I will ask the witness to summarize his testimony in 5 
minutes. Of course, we know the procedure; the yellow light 
means you have a minute left and the red light means stop. 
Then, of course, we will have time to raise questions with you. 
You know the procedure; you have been through this quite a few 
times, so good to have you back.


    Mr. Paulson. Mr. Chairman, thank you, and I will go through 
this quickly.
    First of all, Chairman Towns, Ranking Member Issa, and 
distinguished members of the committee, I appreciate the 
invitation to testify before this committee. I was Secretary of 
the Treasury in 2008. In that role, I had the privilege to work 
with many talented men and women in Government and the private 
sector who labored to pull our Nation back from the brink of 
    The decision to rescue AIG was correct, and I strongly 
supported it. An AIG failure would have been devastating to the 
financial system and to the economy. Today's hearing relates 
the payments to AIG's credit default counterparties. I was not 
involved in any of the decisions made with respect to those 
payments, nor was I involved in any of the decisions about 
AIG's public disclosure of those payments. Those matters were 
handled by the Federal Reserve Bank of New York and the Federal 
Reserve Board. They sought to make appropriate decisions on 
those matters and I am confident that this review will show 
that they did.
    I have limited knowledge on the topics of immediate 
interest to the committee, but I will share the following 
    The rescue of AIG was necessary and I believe that we in 
the Government who acted to rescue it, including Secretary 
Geithner, Chairman Bernanke, and me, acted properly and in the 
best interest of our country. The reasons the rescue of AIG was 
necessary are well worth examining. I believe they are 
representative of the causes of other aspects of the crisis and 
indicate where regulatory reform is necessary.
    There are three reasons we needed to save AIG that stand 
out in my mind. First, AIG was incredibly large and 
interconnected. It had a $1 trillion balance sheet, a massive 
derivatives business that connected it to hundreds of financial 
institutions, businesses, and governments; tens of millions of 
life insurance customers; and tens of billions of dollars of 
contracts guaranteeing the retirement savings of individuals. 
If AIG collapsed, it would have buckled our financial system 
and wrought economic havoc on the lives of millions of our 
    Second, AIG was seriously underregulated. Although many of 
AIG's subsidiaries, including its insurance companies, were 
subject to varying levels of regulation, the parent entity was, 
for all practical purposes, an unregulated holding company. 
Consequently, there was no single regulator with a complete 
picture of AIG or a comprehensive understanding of how it was 
run. It was not until AIG started to fail that regulators began 
to understand how badly managed it had been and how much the 
toxic aspects of parts of its business had infected otherwise 
healthy parts.
    Third, AIG could not be effectively wound down. Unlike 
failed depository institutions, which can be taken over by the 
FDIC with little or no harm to depositors, or the GSEs, which 
were seamlessly placed into conservatorship by Treasury and the 
Federal Housing Finance Agency, there was and is no resolution 
authority available to wind down a failing institution like 
AIG. The only option is bankruptcy, a process that is simply 
not capable of protecting the millions of Americans whose 
finances are intertwined with AIG's.
    The Government rescue of AIG in the fall of 2008 was 
directly shaped by these realities. We had to protect the 
economy and the finances of millions of Americans. We could not 
have anticipated the magnitude of AIG's problems and we had no 
way of letting it fail without disastrous collateral 
consequences. We had to intervene, and I am thankful we did.
    I do not mean to say that I am happy we needed to 
intervene. Taxpayer money should not have to be spent to save a 
misguided and mismanaged enterprise. But the fundamental 
problem lies not in how we intervened, but why we needed to 
intervene. We need to modernize our regulatory structure by 
creating a systemic risk regulator and resolution authority so 
any large firm that fails can be liquidated without 
destabilizing the system. Large financial institutions of this 
country will always play a role that is essential to our 
economic growth, but they must only be permitted to grow and 
interconnect throughout our economy under careful oversight and 
with a mechanism for allowing those connections to be broken 
    Thank you, Mr. Chairman, and I would be happy to answer any 
    [The prepared statement of Mr. Paulson follows:]

    [GRAPHIC] [TIFF OMITTED] T3136.083
    [GRAPHIC] [TIFF OMITTED] T3136.084
    [GRAPHIC] [TIFF OMITTED] T3136.085
    Chairman Towns. Thank you very much for your testimony.
    Let me say that you were deeply and aggressively involved 
in dealing with the financial crisis. We saw that with AIG, of 
course, and Bank of America, and with the TARP. My question is 
why did you sit on the sideline and not use your considerable 
influence to call the CEOs of the counterparties to get them to 
take a haircut? Why wouldn't you do that? I mean, you are a 
person that was very influential in all of this, and I can't 
understand why you wouldn't do that.
    Mr. Paulson. Well, Mr. Chairman, as you indicated, I had no 
involvement at all in the payment to the counterparties, no 
involvement whatsoever. Now, to explain this, we worked very 
collaboratively during the crisis. There was a lot going on, 
coming at us from all sides, and whichever agency had the 
authorities took responsibility for execution. And this was 
clearly a case--it was a Federal Reserve loan. They had the 
authority to make it and administer it, and they had the 
technical expertise to do the restructuring.
    Chairman Towns. But I just see it a little strange that you 
would sit on the sideline and not help the American people in 
terms of--I mean, you were so involved in the early stages and 
throughout the process----
    Mr. Paulson. Mr. Chairman----
    Chairman Towns [continuing]. And then to sit on the 
sideline at a time like this, I just find that----
    Mr. Paulson. Mr. Chairman, anybody that knows me knows I 
was not sitting on the sideline. I was not involved in this 
issue, but I was involved in many other issues every single day 
of the week, including weekends. So I didn't spend----
    Chairman Towns. Why not? Why wouldn't you be involved in 
    Mr. Paulson. Because this was a Federal Reserve loan; they 
had the authority, they had the technical expertise. As I said 
in my testimony, I have great confidence in the 
professionalism, the integrity, the motives, the abilities of 
the people that were handling this. So this was their job to 
handle and I was working on many other things which were in my 
    Chairman Towns. Let me ask another question. Why wouldn't 
you let AIG go into bankruptcy? Why not?
    Mr. Paulson. If AIG had failed--this was a huge financial 
organization, interconnections throughout the economy. If it 
had failed, with the system as fragile as it was, I believe it 
would have taken down the whole----
    Chairman Towns. Can you talk directly into the microphone? 
They are having problems hearing you.
    Mr. Paulson [continuing]. I believe it would have taken 
down the whole financial system and our economy. It would have 
been a disaster. Today, after all the actions that have been 
taken by the U.S. Government, we still have this terrible 10 
percent unemployment level. I believe that if the system had 
come down and failed, we could easily have had unemployment 
reaching or exceeding the 25 percent level we had in the Great 
Depression; we would have lost many additional billions of 
dollars in American savings; home prices would be much lower 
than they are today.
    So as unattractive as the Government rescue of AIG was--and 
none of us that supported that found that to be an attractive 
or desirable option--it was just much, much better than the 
alternative, which would have been economic disaster in this 
    Chairman Towns. I now yield 5 minutes to the gentleman from 
California, the ranking member.
    Mr. Issa. Mr. Chairman, I would ask that we go to the 
Members who did not have an opportunity in the first round. Mr. 
Chairman, I would also ask this one thing. Will you agree, 
since the Secretary said he would answer our questions, to join 
with me in ensuring that all questions are answered or that we 
bring the Secretary back, assuming he does not answer them for 
some reason?
    Chairman Towns. So ordered.
    Mr. Issa. Thank you.
    Mr. Luetkemeyer would be next of those waiting.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    Mr. Paulson, one of the things that we are looking into 
here with AIG, can you explain to me, AIG and their Financial 
Products, was that a subsidiary of AIG or was that part of 
their business model?
    Mr. Paulson. I believe it was part of the business model.
    Mr. Luetkemeyer. There wasn't a separate entity that was 
separately capitalized?
    Mr. Paulson. It was clearly at the holding company and it 
was part of----
    Mr. Luetkemeyer. The thing that makes----
    Mr. Paulson. It wasn't part of an insurance business model, 
but it was sure part of the company's business strategy.
    Mr. Luetkemeyer. Because it makes a big difference. If it 
is not part of the insurance product company and it is a 
subsidiary that is separately capitalized, you can let that 
thing go down and it doesn't impact the insurance part of it, 
which I believe it was. Is that not correct?
    Mr. Paulson. Well, I would say this to you. This company 
was so big and intertwined that it was--if there was any way 
that the people who were working on this could have found a way 
to just hive off and let one small part of the company go 
    Mr. Kucinich [presiding]. Would the gentleman suspend? Mr. 
Paulson, excuse me. We want to make sure that Members can hear 
your testimony.
    Mr. Paulson. OK.
    Mr. Kucinich. You know, it is amazing with so much money in 
this Federal Government, we don't have a better sound system. 
But I am going to need you to speak as closely to that mic as 
you can so everyone can hear you.
    Mr. Paulson. OK.
    Mr. Kucinich. Thank you. You may continue.
    Mr. Paulson. So to just be clear, there was no way to hive 
off and handle this situation differently. There was a very few 
days to act to prevent bankruptcy with no wind-down powers to 
let this company be liquidated and avoid bankruptcy.
    Mr. Luetkemeyer. Well, with all due respect, if it is a 
separate entity, a subsidiary, it could go beyond and the rest 
of it could still stand on itself, sir, but that being----
    Mr. Paulson. Well----
    Mr. Luetkemeyer. Let me move on with another question very 
quickly. In Secretary Geithner's testimony, he indicated that 
he felt that, contractually, the contracts that we had, the 
investments that were made by foreign banks into AIG, that they 
were involved with, needed to be adhered to and worked with. 
Was the Government a part of those contracts?
    Mr. Paulson. As I have said in my testimony, I had no 
involvement with the payment of any of those contracts. I just 
was not involved in that matter.
    Mr. Luetkemeyer. So the Government wasn't a party to the 
contracts, then.
    Mr. Paulson. What?
    Mr. Luetkemeyer. The Government wasn't a party to the 
    Mr. Paulson. Again, this was not something that I was 
directly involved in. I said that I very much trust the motives 
and the abilities and the judgments of the people that made 
those decisions, but I wasn't party to them and I can't answer 
that question.
    Mr. Luetkemeyer. OK. Well, that's one of the frustrations. 
I appreciate your candor, but my frustration with the Chair in 
that we don't get full testimony and be able to get all the 
questions asked and then answered so we can come to you with 
what we feel is good information to be able to get some good 
back and forth here. So I apologize to you.
    Let me move on to something else. I know right now we are 
looking at, and the President has proposed, some too-big-to-
fail sort of strategies to try and address the issue of too-
big-to-fail. Where are you in this debate? What do you think 
about the proposal that is on the table right now, sir?
    Mr. Paulson. When I was Secretary of the Treasury, I put 
out a regulatory blueprint, and I still believe that is the way 
to go. I am very--I think it is essential that we have wind-
down authorities, resolution authorities so that any financial 
organization, no matter how big, can be liquidated outside of 
the bankruptcy process without taking down the rest of the 
    So I think that is essential, and there are some parts of 
the proposals that are up here being debated by Congress which 
are the same as in the regulatory blueprint we put forward, a 
big one being the systemic risk regulator, and I am strongly in 
favor of a systemic risk regulator.
    Mr. Luetkemeyer. Do you believe that we need to take the 
risk investments that are part of many of the big banks right 
now and take them off the books and have a subsidiary for this, 
so we can go back to Glass-Steagall firewall there?
    Mr. Paulson. That is not my recommendation. I believe that 
when you look at the crisis, what I saw in the crisis was that 
it was across a number of types of financial institutions, and 
the excessive risk-taking I saw was not limited to one business 
activity, it was much broader than that, and I think we need a 
broader approach. So, again, what I favor is a systemic risk 
regulator and wind-down authorities is the way I would handle 
    Mr. Luetkemeyer. Well, one of the problems I have with what 
you are suggesting, sir, is that suddenly now we have the 
taxpayers, through FDIC insurance, on the hook for these risk 
takers who are out here. I think it is important that we take 
these things off the books and have a subsidiary. If it goes 
down, it goes down and the banks and the insurance funds and 
the taxpayers as a whole are not on the hook for all this. I 
think it is very important we go down that road, because I 
think what you have done with AIG is suddenly used the Federal 
Government as the official underwriter of all investments in 
the world. If we are underwriting foreign contracts, 
investments, what have we done? We have gone down that road.
    I appreciate your comments and I yield back to the Chair.
    Mr. Kucinich. The gentleman's time has expired.
    The Chair, in keeping with the necessity of making sure 
that Members who did not ask questions the last round, are 
given a chance to go first. We recognize Mr. Tierney. Thank you 
for your patience and you may proceed for 5 minutes.
    Mr. Tierney. Thank you, Mr. Chairman.
    Mr. Paulson, thank you for being here this morning. So you 
were in full agreement with not allowing AIG to go bankrupt.
    Mr. Paulson. Absolutely.
    Mr. Tierney. I think, back home, people don't know where to 
give the credit for this, so I want to make sure we give credit 
where credit is due if that was a good decision. People see Mr. 
Geithner now as Treasurer, and they think the decisions were 
all made by him when he was Treasurer. In fact, these were 
decisions made in 2008. You were President Bush's Secretary of 
the Treasury, correct?
    Mr. Paulson. Absolutely.
    Mr. Tierney. And Mr. Bernanke was the head of the Fed. 
Then, of course, we had the New York Federal Reserve Board 
participating in these conversations as well. So you were 
pretty much the group that decided that they should give $85 
billion in September to AIG. Those were mostly the 
participants, am I right?
    Mr. Paulson. Yes. As I said in my testimony, I very much 
supported that rescue.
    Mr. Tierney. And then in November it was the same group--
you, as President Bush's Secretary of the Treasury, Mr. 
Bernanke, and the New York Fed--decided to give additional 
funds to AIG, some of which we used to pay the counterparties 
to the contracts, right?
    Mr. Paulson. Yes. In November, in the TARP, we made a $40 
billion capital investment, and then the Fed put some 
additional money in, which was used up for the contracts.
    Mr. Tierney. Just so we are clear--we are giving credit 
here--the TARP, the $700 billion in TARP, in fact, was during 
your term as Secretary of the Treasury under President Bush.
    Mr. Paulson. Yes. I am proud of that. So that----
    Mr. Tierney. That was your idea, was it, the TARP?
    Mr. Paulson. It was a number of our ideas, but, yes, and 
that is something I am proud of and something that was very 
    Mr. Tierney. And the $85 billion that was loaned to AIG was 
not appropriated by Congress; nobody asked Congress to make a 
vote on that, am I right?
    Mr. Paulson. No, that was a decision taken by the Fed with 
the support of----
    Mr. Tierney. What source of money did they use to get that 
$85 billion?
    Mr. Paulson. They used their funds.
    Mr. Tierney. And their funds emanate from where?
    Mr. Paulson. From the U.S. Government.
    Mr. Tierney. Well, were they fees from other banks, did 
they come from your Treasury? Where did they come?
    Mr. Paulson. They come from--the Fed, obviously, can print 
    Mr. Tierney. OK. And did they take money that they had from 
fees charged to member banks or did they print money to 
accommodate this $85 billion?
    Mr. Paulson. You would have to ask the Fed that.
    Mr. Tierney. You are not aware through any discussions 
where that was?
    Mr. Paulson. I would like them to answer that question.
    Mr. Tierney. Well, you may not like to answer the question, 
sir, but if you know the information, I am asking you to share 
with us what is your best understanding of where that money 
came from.
    Mr. Paulson. My best understanding is all dollars are 
green, so those are ultimately taxpayer dollars, and that was 
    Mr. Tierney. We are painfully aware that they are taxpayer 
dollars, sir.
    Mr. Paulson. That was why the Treasury was supportive and 
we were very supportive of that transaction.
    Mr. Tierney. OK, we all understand that the full faith 
promise comes from the Government on that and they were 
taxpayer dollars, we are painfully aware, but I am asking you 
whether, since they didn't come to Congress for an 
appropriation, whether the $85 billion came from fees charged 
to member banks, was newly printed money, or some combination 
of the both.
    Mr. Paulson. I don't believe it came from fees charged from 
member banks.
    Mr. Tierney. All right, thank you. Now, we got to the point 
where a decision had to be made about whether or not to let AIG 
go bankrupt. Later it came to a point whether or not to pay the 
counterparties 100 percent on those contracts or not. But once 
the decision was made not to let them go bankrupt, you lost any 
leverage, really, to argue in terms of getting--being able to 
pay less than 100 percent. Is that a fair statement?
    Mr. Paulson. As I said, I didn't participate in those 
decisions regarding payment, and I also said we didn't have the 
wind-down powers.
    Mr. Tierney. But you were involved--I forget how many 
Congresswoman Kaptur said that there were phone calls between 
the New York Fed and you.
    I will yield.
    Ms. Kaptur. 225.
    Mr. Tierney. 225 telephone conversations between the head 
of the New York Fed and you during this period of time, so I 
think we might be fair in assuming that you were discussing 
some of these matters?
    Mr. Paulson. Well, we had many matters to discuss----
    Mr. Tierney. And this was one of them, right?
    Mr. Paulson [continuing]. Over a range of things, and the 
matters we discussed--we clearly discussed the rescue. As I 
said, I did not have involvement and was not discussing----
    Mr. Tierney. Here is my final question. I need your help 
with this. Most people at home hear people draw the conclusion 
that not to allow AIG to go into bankruptcy would have been 
devastating because the consequences would have been severe. It 
would be enormously helpful if you could put yourself in the 
position of the local bookkeeper for a medical firm or 
housekeeper or lawyer or teacher's aide. How specifically would 
that individual have been harmed if you had not made the 
decision to not allow AIG to go bankrupt? What would have been 
the consequence to them?
    Mr. Paulson. And that is the right question, Congressman, 
because they were the real victims. They would have lost jobs, 
would have lost----
    Mr. Tierney. But how? How would that have happened? Show 
me, from the time you made the decision, what would it have 
spiraled down to affect their lives.
    Mr. Paulson. Well----
    Mr. Kucinich. The gentleman's time has expired, but the 
witness would be pleased to answer his question, I hope.
    Mr. Paulson. OK. What I believe, we were--at around the 
time of the AIG rescue, when markets were frozen, we had a 
situation in this country where even blue chip industrial 
companies were having trouble financing. I knew we were on the 
brink. That if AIG had gone down, I believe that we would have 
had a situation where Main Street companies, industrial 
companies of all size would not have been able to raise money 
for their basic funding, and they wouldn't have been able to 
pay their employees, they would have had to let them go. 
Employees wouldn't have paid their bills. This would have 
rippled through the economy.
    Today, Congressman, we have, after everything that was 
done, all the resources, we have 10 percent unemployment. I 
believe we easily would have had 25 percent unemployment. Today 
we have home prices that have dropped precipitously in some 
parts of the country. Home prices would have gone much lower. 
AIG guaranteed tens of billions of dollars of savings for 
retirement savings for Americans. There would have been great 
losses. This would have been an economic nightmare.
    Mr. Kucinich. Thank you, Mr. Paulson.
    Mr. Tierney. Thank you.
    Mr. Kucinich. The Chair recognizes Mr. Souder.
    Mr. Souder. Thank you. I have a variation of the same 
question you were just going through, because one of the 
problems we have is that it appears that AIG was treated 
differently than other companies throughout this whole thing in 
this sense, that the holders of the debt were paid at par, 
which means that, in effect, the banks got 100 percent but, for 
example, GM creditors, small businesses all across America, and 
other companies that were let go, they got 10 cents on the 
dollar or 30 cents on the dollar; and it is part of a fact, a 
perception that was unfair, that Wall Street was covered but 
Main Street wasn't, in debt.
    Now, AIG was different in what sense? Now, I know--was it 
120 separate finance companies and 80 insurance, or is that 
flipped? Something like that. In other words, it was a 
collection, it wasn't one.
    Mr. Paulson. It was a big complex collection of companies, 
    Mr. Souder. And that if the insurance divisions were 
separated and came under State, part of the argument is State 
regulation, that they were so intertwined with the finance.
    But let me ask one other question before we get into 
details of that. You said bankruptcy wasn't an option, but it 
also meant that did you try to put pressure on the people who 
held the debt to write down some of their debt, or once you 
made the statement ``we weren't going to let it fail,'' were 
they just playing hardball in saying we weren't going to write 
down anything? Why didn't they get the same pressure that GM 
suppliers had and everybody else to write down their debt?
    Mr. Paulson. As I have said--and this isn't me trying to 
suggest anything was done wrong--I had nothing to do with that, 
so I was not involved in the negotiation. I was not involved in 
anything surrounding those payments. But I will explain one 
thing to you which is fundamental for you to understand is the 
Government--we have an antiquated regulatory system and a lack 
of the necessary authorities. So if there was a bank, there is 
a way to wind that down. But this was a non-bank and there 
    Mr. Souder. OK, I understand that. Let me----
    Mr. Paulson. There is no way to avoid it.
    Mr. Souder. Let me ask you--there is no way except the 
threat of real bankruptcy. If you are a bank and think you can 
negotiate at par and get a full percent, and you don't have a 
threat of bankruptcy, the question is did anybody threaten 
    Did anybody say that we are not going to--I mean, did we, 
in effect, yield the debate at the beginning, they played 
hardball, and we had no way to do it; that if in effect you 
would have even threatened to say, hey, we can cover the 
insurance people, but the finance side over here, you better 
negotiate down or that side will go bankrupt, and then you 
would wind up probably having to do what we did in TARP anyway, 
which was put cash reserves into the banking system to try to 
cover the fact that the bankruptcy went out.
    Would that not be true? In other words, had they gone 
bankrupt and there really was a catastrophic threat--which I 
believe, because I voted for TARP--a catastrophic threat, 
wouldn't you have just had to put more money in the banking 
system, but not necessarily at par?
    Mr. Paulson. As I said, Congressman, I wasn't involved in 
that, so I can't----
    Mr. Souder. You are saying the New York Fed did that.
    Mr. Paulson. I can't comment beyond what I have said.
    Mr. Souder. When you got involved, once TARP was there, the 
decision was already made that it wasn't going to go bankrupt, 
is that correct?
    Mr. Paulson. When I--first of all, I was involved in 
supporting the initial rescue, and then----
    Mr. Souder. So you were involved. Just a second. You were 
    Mr. Paulson. Yes.
    Mr. Souder. And did you advise the Fed to try to get what 
they could and not to pay at par?
    Mr. Paulson. What the Fed--the initial rescue was not the--
was not when they dealt with the payment to counterparties. So 
I supported the Fed on the initial loan, and then, later, in 
November, the situation had deteriorated to the point and 
values in insurance businesses all around the world had 
deteriorated to the point that this was a company that would go 
down without capital. So now we had capital and my team and I 
participated in making that decision, made the decision to put 
$40 billion of equity into AIG.
    Mr. Souder. The problem that I have is that it appears to 
me that AIG was treated differently, so much so. Even listening 
to that, it is like, ``well, we put some money in initially and 
then we put more money in because they couldn't fail;'' where, 
in the other--everything from Citibank to Merrill Lynch to 
everything else there were processes where there were 
conditions on money coming in, where there were guidelines on 
money coming in and they used the leverage of the threat of 
bankruptcy to do that. Then, in this case, it appears that it 
was different, and it partly is that the creditors were 
    Furthermore, some of the critical information here was 
withheld from being public at the request of the New York Fed. 
Had that been public, people would have seen it. And there was 
an attempt to even keep it quiet because that was critical, 
that information, to understand what was going on behind. And 
it is extremely frustrating to all of us on this committee--you 
can hear it in different types of questions--about how this 
came to be, and I don't think there has been a compelling case 
made that AIG is unique.
    Mr. Kucinich. The gentleman's time has expired, but I would 
say that if Mr. Paulson wants to respond to the gentleman, you 
may do so, and, if not, we will go to the next questioner.
    Mr. Paulson. I have no response.
    Mr. Kucinich. OK. I thank the gentleman.
    The Chair recognizes Mr. Kanjorski.
    Mr. Kanjorski. Thank you very much, Mr. Chairman.
    Welcome back, Mr. Paulson. You really miss Washington, I 
    Mr. Paulson. You can't guess how much.
    Mr. Kanjorski. I listened to the comments of the Secretary, 
your successor, and now you, and I am listening to the Members' 
questions and how much memory is lost in a year or 14 months 
from those fateful days in September and October, which all of 
us hope we never relive, but, in fact, were very much 
significantly different than today, and the coolness of being 
able to answer.
    One of the questions I was particularly interested in, 
because I was very involved at that time with AIG and what was 
happening from my aspect of having some jurisdiction over 
insurance, is that as I understand it, because of Financial 
Products in London was without assets and had a tremendous 
involvement in counterparty positions for about $2.8 trillion, 
and whose counterparty positions were starting to fail and they 
had to honor them, their initial internal decision of AIG was 
to use the assets of the world's largest insurance company, and 
they sought permission and it was pending and finally approved 
by their regulator, the State of New York, to take assets out 
of the insurance companies, about $30 billion, and use those 
assets to cover their exposed counterparty and positions.
    Now, if that had happened at that time, those insurance 
companies would have failed because their assets would have 
been taken, converted, and there wouldn't have been enough to 
cover the counterparties, so it would have wiped out the 
insurance companies, which in turn would have affected every 
insurance holder in the country that was involved with AIG at 
the time, and would have been a catastrophic collapse of the 
insurance industry, notwithstanding the counterparty derivative 
    Now, luckily, the regulator in the State of New York didn't 
grant us permission to use that $30 million until much later, 
when it was futile. At that point, the losses on the 
counterparty positions, I think, rose to $55 billion and were 
climbing on a daily basis, and that is when the infusion of 
funds that you talk about, adding equity to AIG or the capacity 
through the use of Government funds to cover those counterparty 
losses. They didn't cover all those losses and, subsequently, 
within probably 30 days, another huge amount of money was 
infused into AIG's various corporate structures to get some 
    And not that I could say nothing has changed from that, but 
that was the significant circumstances in this month or 2 
months after September 18th that everybody was faced with. But, 
as I understand it, the Federal Reserve was the person with the 
checkbook under the incidence under 3.13 powers, they were just 
plugging that money in.
    And it wasn't a decision made at the Secretary's level of 
Treasury or at the Presidential level, it was a Federal Reserve 
regulator level that was making that decision; and I dare say 
regulator not for AIG, but regulator that had regulation over 
some of the largest banking institutions in the world, that if 
their counterparty positions weren't honored, they would have 
immediately collapsed. And that is what we were calling the 
meltdown. Everything was going to implode and you had to stop 
it at the headwaters, not wait until it got out to the little 
dams out in the stream.
    Is that relatively the correct position?
    Mr. Paulson. I would say, without signing off on every fact 
you mentioned, I would say you've got it in the sense that this 
was a very complex company and there was--if it had gone into 
bankruptcy, it would have been a huge mess and it would have--
one part of the company would have contaminated the other and 
it would have rippled through the U.S. economy, and the result 
would have been absolute disaster.
    Mr. Kanjorski. Mr. Chairman, I know there are other 
questioners. I have had the opportunity to ask some today, so I 
yield back the balance of my time.
    Mr. Kucinich. I thank the gentleman for his courtesy.
    Before I recognize Mr. Bachus, I want to take the liberty, 
as Chair, to recognize students from Padua Franciscan High 
School in Parma, OH, visiting the Capitol and seeing their 
government at work right here. So welcome, you and your teacher 
and we are pleased that you stopped by for a visit. Thank you.
    The Chair recognizes Mr. Bachus of Alabama.
    Mr. Bachus. Welcome, former Secretary. Secretary Paulson, 
March 2009, March 16th was when AIG was--the payments were made 
to AIG or guaranteed. Leading up to that, you participated in 
several meetings about AIG, is that correct?
    Mr. Paulson. Prior to March of----
    Mr. Bachus. Of 2009.
    Mr. Paulson. Prior to March? Yes, I had a number of 
meetings about AIG as we were putting in capital.
    Mr. Bachus. I know one of the meetings--I am looking at 
March 24th, my questioning of Mr. Geithner, he mentions, 
Secretary Geithner, that you--he said that he and you met with 
AIG to discuss Lehman's failure.
    Mr. Paulson. To discuss what?
    Mr. Bachus. September 14th. Now, that was 2 days before.
    Mr. Paulson. Oh, yes. You are saying--you were talking 
about March 2009. I think you are talking about September 14, 
    Mr. Bachus. That is right. OK. I stand corrected. That 
discussion--but you participated in some of the discussions 
about AIG and their financial condition leading up to----
    Mr. Paulson. Yes. And that weekend of September 13th and 
14th was the weekend when we had financial institutions 
together working to come up with a solution to prevent the 
failure of Lehman, and it was that weekend that we learned also 
about AIG, and I had two meetings over the course of that 
weekend at the New York Fed with Tim Geithner, with officials 
from AIG.
    Mr. Bachus. In those meetings, was there any discussion of 
asking the counterparties to take less than 100 percent?
    Mr. Paulson. Was there any discussion of what?
    Mr. Bachus. Any discussion of the counterparties taking 
less than 100 percent?
    Mr. Paulson. I certainly don't recall any. We were talking 
about the financial problems that AIG had and it was clearly--
they clearly had issues with counterparties.
    Mr. Bachus. What?
    Mr. Paulson. They clearly had issues with counterparties, 
because that was the crux of the issue, a potential ratings 
downgrade which would cause the company to have to post 
collateral. So that would lead to----
    Mr. Bachus. So the obligation to the counterparties was 
    Mr. Paulson. Well, obviously, that was the issue. Any 
institution that is facing failure is going to have an issue 
with paying creditors.
    Mr. Bachus. You know, once that intervention occurred, then 
really the taxpayers, the U.S. Government owned 79.8 percent of 
AIG, more or less. Is that correct?
    Mr. Paulson. Yes.
    Mr. Bachus. That being the case, I see in this same, March 
15, 2009, this is skipping forward to March 2009. Secretary 
Geithner emailed William Dudley and Edward Quince and he said, 
``Where are you on the AIG counterparty disclosure issue? Are 
you for disclosing or not?''
    Mr. Issa. Would the gentleman yield? Could you put up slide 
1 so they could see it? Thank you.
    Mr. Bachus. What would your advice have been on whether or 
not that should have been a public disclosure of the 
counterparties and their obligations? And would the fact that 
really the taxpayers own over 79 percent, almost 80 percent of 
the company have made any difference?
    Mr. Paulson. Well, as a general proposition, I am very much 
for disclosure, but I wasn't part of this. I had nothing to do 
with that decision. And I am not going to sit here now and 
second guess others that were, you know, that I know people 
with strong integrity and good will tried to do the right 
    Mr. Bachus. Well, just take a situation where you do have a 
company that is, you know, 80 percent-owned by the U.S. 
Government. Would that tend to make you think that there ought 
to be disclosure of their obligations?
    Mr. Paulson. Well, public companies----
    Mr. Kucinich. The gentleman's time has expired, but you can 
answer his question.
    Mr. Paulson. I will be brief. Public companies have 
disclosure obligations and that is governed by the SEC, and I 
think those need to be adhered to.
    Mr. Bachus. Thank you.
    Mr. Kucinich. OK, I thank the gentleman.
    The Chair recognizes Mr. Cummings of Maryland. You may 
    Mr. Cummings. Mr. Paulson, good seeing you again. Let me 
ask you this. Mr. Paulson, do you realize that a lot of the 
American people believe that there is a sort of Wall Street 
club, and that, let me finish, that you all play golf together 
and you have a lot of fun, and then you, you know, when the 
billions come around you are able to kind of distribute them.
    I mean, I am just saying, do you know that is how people 
    Mr. Paulson. I sure do. And even though----
    Mr. Cummings. Can you keep your voice up?
    Mr. Paulson. I said even though I am not a golfer, I sure 
know that is how people feel.
    Mr. Cummings. Yes, and when they see these deals going on, 
then the next thing they do is they begin to look at where 
people work, and then they see the relationships and then they 
say, well, you know, we don't have a chance because it seems 
like they are kind of looking out for themselves, but not 
looking out for us.
    So, you know, you just gave a statement about transparency, 
and, you know, and I think one of the things that bothers 
people was when they don't see transparency, then they begin 
not to trust. And when they begin not to trust, it becomes very 
difficult for them to go along with any program.
    And then when you put on top of that they can't see 
themselves benefiting, and I know that you mentioned that if we 
didn't do what we did, unemployment may have gone up to 25 
percent, but it is hard for people to even see that.
    You understand?
    Mr. Paulson. Yes, I, Congressman, you have it. And that is, 
people are very, very angry, and I understand it, why they are 
angry, and they are rightfully so, because they don't see the 
connection. And they don't recognize that what was done wasn't 
done for the bank. They were going to be the victims if we 
didn't step in.
    Mr. Cummings. And so among the conditions in the TARP-AIG-
SSFI Investment Senior Preferred Stock and Warrant summary of 
senior preferred terms, as posted on the Treasury Department's 
Web site, the following condition was noted: ``The annual bonus 
pools payable to senior partners in respect of each of 2008 and 
2009 shall not exceed the average of the annual bonus pools 
paid to senior partners for 2006 and 2007.''
    Do you believe it was appropriate for Treasury to allow AIG 
to create any bonus pool for senior partners, considering it 
had just found it necessary to extend $40 billion to the firm 
through the TARP?
    Mr. Paulson. I am not going to get into second guessing 
decisions that were made at Treasury about bonuses. I realize 
this was a very difficult decision because the taxpayer had a 
lot of money in this company.
    Mr. Cummings. Right.
    Mr. Paulson. And this company needed to perform well and 
needed to hold the team together in order to repay taxpayers.
    Mr. Cummings. Right, and the taxpayers were saying to 
themselves, look, these are our tax dollars. We work hard for 
these tax dollars and now these guys, who screwed up 
everything, are getting bonuses.
    Mr. Paulson. Yes, you are right. No one, me included, likes 
to see private business profit from taxpayer assistance. That 
makes people angry. And to me, I just hope that part of that 
anger is not a diversion from what we need to do, but is an 
incentive to fix the system so that we will have resolution 
powers and never again will have a company that is so big, too 
big to fail, so the taxpayer has to come and put money in; that 
a company can be liquidated and wound down in a way in which 
the taxpayer is not on the hook again.
    But so I understand there is that anger out there and that 
frustration. I think it is very understandable. And I think 
there are a number of ways to do something about it, but the 
best way to do something about it is reform the system so that 
we don't ever again have to bail out a big institution, rescue 
a big institution. It could be liquidated if it fails.
    Mr. Cummings. Now, with regard to the original Treasury 
TARP investment in AIG, was this structured as a loan or as an 
equity investment?
    Mr. Paulson. Congressman, it was an equity investment.
    Mr. Cummings. And was this in the AIG parent holding 
company or in the individual subsidiaries?
    Mr. Paulson. This was in the parent. This was a $40 billion 
equity investment because the company needed equity.
    Mr. Cummings. And was it made subordinate to any other 
creditors of AIG?
    Mr. Paulson. Well, a preferred is by definition senior to 
the common, and subordinated to the other creditors.
    Mr. Cummings. And how does this compare to the various 
Federal Reserve investments in AIG?
    Mr. Paulson. Well, this is subordinate to the other Federal 
Reserve investments in AIG because a determination was made. 
The rating agencies had basically said that you need to put 
capital in this institution or there will be a downgrade, and 
then they would have precipitated the failure.
    Mr. Cummings. And why was it structured in this way?
    Mr. Paulson. It was structured in that way because that is 
the way a preferred needs to be structured. It wouldn't have 
been capital if it hadn't been subordinated to the other 
    Mr. Cummings. I see my time is up.
    Thank you, Mr. Chairman.
    Mr. Kucinich. I thank the gentleman.
    The Chair recognizes Mr. Stearns from Florida. You may 
proceed for 5 minutes.
    Mr. Stearns. Thank you, Mr. Chairman.
    Mr. Paulson, Mr. Geithner has testified that he recused 
himself during this counterparty negotiation. Did you know that 
while you were Secretary of Treasury?
    Mr. Paulson. I knew that----
    Mr. Stearns. Just yes or no.
    Mr. Paulson. Yes.
    Mr. Stearns. You did know. OK.
    Mr. Paulson. Tim Geithner did not participate in any--I 
didn't view him as a decisionmaker. I viewed him as recused.
    Mr. Stearns. OK. Did he call you up and advise you that, I 
have recused myself? Did he call you up?
    Mr. Paulson. He----
    Mr. Stearns. How did he notify you?
    Mr. Paulson. Well, he told me on the phone that he did not 
think it would be appropriate for him to be viewed as a 
    Mr. Stearns. Did you know he never got a letter? All he 
did, he testified that he recused himself. He decided. He put 
up a flag and said, I recuse myself; I am not going to be 
involved with the counterparty negotiation. He didn't get a--
like you went to the White House Counsel and you went to 
Secretary of Treasury, you got a letter. He never got a letter. 
He never got a written confirmation of his recusal.
    Did you know that? Do you know that he was just doing it on 
his own by his own volition?
    Mr. Paulson. I did not know the details.
    Mr. Stearns. OK. Did you think a person who would recuse 
himself in this crisis we had, that he could go about and 
operate in his present job and not have a conflict of interest? 
Did it ever occur to you to say, ``gee, the chairman of the 
Federal Reserve is in this crisis; we are having the 
counterparty negotiations, and by golly, he is going to step 
aside and says he knows nothing about it.'' That is what he is 
saying today. Doesn't that seem sort of fakey to you?
    Mr. Paulson. No, it didn't, because I thought it was an 
extraordinary position we had to have a presently New York----
    Mr. Stearns. OK, I understand. Now, the next question in 
open testimony that his chief of staff, while he was chairman 
of the Federal Reserve, was a former employee of Goldman Sachs. 
Did you know that?
    Mr. Paulson. Yes.
    Mr. Stearns. Did you ever call his chief of staff, former 
employee of Goldman Sachs, during the process for the 
counterparty negotiations? Did you ever call him? If I go 
through the logs, will I see your name calling him?
    Mr. Paulson. His chief of staff, who is a former employee 
of Goldman Sachs----
    Mr. Stearns. And he worked for you when you were CEO.
    Mr. Paulson. He didn't take on that job until after I had 
left, and he had become Treasury Secretary.
    Mr. Stearns. Did you ever call him at all? If I go back to 
the logs, will I find that you called Geithner's chief of 
staff, former employee of Goldman Sachs, during the 
counterparty negotiations?
    Mr. Paulson. Yes, I, no, I didn't.
    Mr. Stearns. You never called him?
    Mr. Paulson. As I said, the former--his chief of staff, I 
think is the person you are referring to----
    Mr. Stearns. We didn't know about it until today.
    Mr. Paulson [continuing]. Is someone who became his chief 
of staff when he became Treasury Secretary after I had left 
    Mr. Stearns. No, he said that while he was at the Federal 
Reserve, he was his chief of staff. That is what he said today.
    Mr. Paulson. I don't believe that was the case.
    Mr. Stearns. OK. All right.
    Mr. Paulson. But in any event, when he was----
    Mr. Stearns. OK, let me just go on. I have the time.
    Mr. Paulson. I talked with Tim.
    Mr. Stearns. Here is the problem I think a lot of us are 
having. Mr. Geithner said he was not involved with the 
counterparty negotiations. You are saying you were not 
involved. Oh, yes, you heard a little bit about it, but on 
November 6th when they gave $62 billion to all these parties 
who came in and looted AIG, all you guys say, I knew nothing 
about it. And yet it appears that this happened.
    Now, recently Michael McRaith, who is director of the 
National Association of Insurance Commissioners, told the 
Senate Banking Committee, he said, you know, if AIG had gone in 
bankruptcy, we would have taken care of it. It would have been 
an orderly disposition. This is what he said: ``AIG's insurance 
operations and their other companies would have simply--we 
would have simply bought up AIG's insurance assets, allowing a 
seamless delivery of AIG's insurance obligations.''
    So the question is, considering that the State Insurance 
Commissions would likely have seized AIG's insurance 
subsidiaries, protected policyholders in an AIG bankruptcy, why 
was it necessary to bail out AIG with taxpayers' money, based 
upon the testimony of the director of the National Association 
of Insurance Commissioners?
    Mr. Paulson. I respectfully disagree with him, and I 
believe that it is----
    Mr. Stearns. So you disagree with this guy, with all his 
knowledge, his years of experience?
    Mr. Paulson. I will just say many people with years of 
experience had some regulatory responsibilities with regard to 
AIG, but this company was had a huge problem, and it is case 
No. 1 on what is wrong with our regulatory system. There was no 
single regulator that had a line of sight on the total company. 
So there were regulators that looked at different pieces of it, 
and if the company had gone down, it would have been a huge 
    Mr. Stearns. Is your testimony--Mr. Geithner sort of 
implied. He scares Members of Congress. He scares the public. 
We are all scared. He said, ``If AIG was not bailed out, this 
country would have collapsed.'' He intimated our Constitution 
would not have been able to be enforced. There would be a 
revolution in this country.
    Do you think it is at that extreme if we let AIG go 
bankrupt, we would have had that kind of collapse and 
revolutionary spirit in this country? Is that what your 
position is today?
    Mr. Paulson. I certainly have never said that, but what I--
    Mr. Stearns. He implied that.
    Mr. Paulson. What I have said is I believe we would have 
had absolute economic disaster.
    Chairman Towns. The gentleman's time is expired.
    I will now recognize the gentleman from Ohio, Mr. Kucinich.
    Mr. Kucinich. Thank you, Mr. Chairman.
    Secretary Paulson, thank you for being here today.
    In your testimony, you state that in your capacity as U.S. 
Treasury Secretary, you were not involved in any decisions with 
respect to payments to AIG's counterparties and that you were 
not involved in any of the decisions concerning AIG's 
disclosure of those payments.
    I would like to accept that at face value, Mr. Paulson, 
except the critical decisions concerning payments to 
counterparties were made after the passage of the Emergency 
Economic Recovery Act by Congress at your request, and the 
Emergency Economic Recovery Act made the Treasury Secretary 
responsible for the use of funds authorized by Congress. 
Negotiations on the counterparty payments by the Federal 
Reserve Bank of New York did not begin until November 6, 2008, 
and the funding of the payment of the counterclaims was backed 
by funds made available under the Emergency Economic Recovery 
    So Mr. Paulson, doesn't it make it your responsibility to 
know how those funds were used?
    Mr. Paulson. I think you will find, Congressman, and I 
think SIGTARP reported this, that the TARP investment, the $40 
billion TARP investment, was equity, and that those funds did 
not go into this Maiden Lane vehicle where the Fed loan----
    Mr. Kucinich. So you didn't have any knowledge of the 
counterparty payment transactions?
    Mr. Paulson. I did not.
    Mr. Kucinich. Are you telling us that?
    Mr. Paulson. I did not.
    Mr. Kucinich. And are you telling us that you were not 
aware of any of the discussions leading to the counterparty 
payments with any of the principals?
    Mr. Paulson. That is what I am telling you.
    Mr. Kucinich. And you are telling us that as Treasury 
Secretary, you had no role whatsoever in the decision on 
counterparty payments, that you didn't ask anyone any 
questions, that you never expressed an opinion on the matter, 
and you were completely unaware of the nature of proposed 
transactions until it was consummated, and no one asked you any 
questions about how these Emergency Economic Stabilization Act 
or the Recovery Act funds would be used to stabilize AIG, the 
one financial institution more than any other that was behind 
the crisis. You just didn't know.
    Mr. Paulson. Well, Congressman, we asked a lot of questions 
about the $40 billion TARP equity investment. That was 
something that was our job and it was our authority.
    Mr. Kucinich. Did you ask about the counterparty payments?
    Mr. Paulson. And as I said, the loan, that was a Fed 
authority and they had the authority and the technical 
expertise to handle that. And that was their job, and we were 
consumed with other matters and had great confidence in them to 
carry out their responsibilities very professionally and well.
    Mr. Kucinich. Well, you know, Mr. Paulson, no one disputes 
that you worked very hard throughout the crisis. It is well 
known you were personally talking with senior executives at all 
major financial institutions on your now legendary cell phone, 
which I might add is in the Museum of American History.
    But how is it that you played no role in the handling of 
this AIG relief? That you didn't have an interest in it? How is 
it that despite Goldman Sachs' extensive role as a counterparty 
to an agent for AIG in transaction, your extensive personal 
network of associations within Goldman, which extended to 
several Goldman alumni on staff at Treasury, that you can say 
that you didn't have any knowledge, and by implication, no 
influence over the transaction? I don't understand that.
    Mr. Paulson. Well, it can't be any clearer. I assumed that 
Goldman Sachs--knew that Goldman Sachs and I assumed most other 
major financial institutions were counterparties, but I had no 
knowledge of what the individual claims were and my concern 
here was not about counterparty claims when we rescued AIG. My 
concern was about what was going to happen to the American 
economy and the American people.
    And again, you need to understand when we worked together, 
Fed and Treasury, we had different authorities, different 
responsibilities, and there was so much going on that we had a 
lot to do, and they had the authority and responsibility for 
dealing with the loan----
    Mr. Kucinich. The thing that I have trouble with, though, 
is that the government gave Goldman Sachs, your former firm, a 
better deal than it had a right to expect. You heard the 
previous testimony here. It is mystifying how you, as Treasury 
Secretary, this could happen and you not really know anything 
about it unless you recused yourself from any discussions about 
AIG, or about Goldman Sachs.
    Mr. Paulson. I didn't have to recuse myself because the 
fact was no one discussed it with me, consulted with me. I was 
involved in other matters. This was a Federal Reserve authority 
and they had the technical expertise and that was their job.
    Mr. Kucinich. Thank you, Mr. Paulson. Thank you.
    Chairman Towns. The time of the gentleman has expired.
    Just so you know, we have four votes. At this time, I would 
ask if anyone has not [remarks off mic].
    No, I am saying we have votes on the floor, and of course 
we have four votes and that we, due to previous agreement with 
Mr. Paulson, we are now going to allow him to go.
    Mr. Issa. Mr. Chairman.
    Chairman Towns. Yes?
    Mr. Issa. Could we ask if Mr. Paulson could stay just for 5 
more minutes to complete on our side? Two people will split 
    Chairman Towns. Two? Well, let me put it this way, then. 
Who all has not had an opportunity? One, two, three.
    Mr. Paulson, could you give us another 7 minutes, and let 
me split 3\1/2\ and 3\1/2\?
    Mr. Paulson. Yes. OK. We can work it.
    Ms. Watson. Mr. Chairman, I would be willing to put mine in 
writing to Secretary Paulson if he would be willing to respond 
within a certain given time.
    Chairman Towns. Mr. Secretary? Yes.
    Mr. Secretary, there is a request in terms of if we give 
the questions to you in writing, you will respond.
    Mr. Paulson. Yes, we will get back to you.
    Chairman Towns. Thank you very much. OK, yes.
    Mr. Burton. Mr. Paulson, you were----
    Chairman Towns. Let's see how we are going to break this 
down first.
    Mr. Burton. You were one of the chief operating officers in 
    Chairman Towns. Will the gentleman yield?
    You are going to give us an additional 7, 8 minutes?
    Mr. Paulson. Is it? OK.
    Chairman Towns. OK. Good. All right, so we will break it 
down four. OK.
    Mr. Paulson. It really will be 8 minutes, right?
    Chairman Towns. Right; 8 minutes.
    Mr. Burton. You were one of the top officers for Goldman 
Sachs, right?
    Mr. Paulson. Yes, the top officer.
    Mr. Burton. And some of the people that work for Goldman 
Sachs went to work for Mr. Geithner?
    Mr. Paulson. I believe I know----
    Mr. Burton. Yes. And when you left Goldman Sachs and went 
to the Treasury, you were there 3 years and you got $200 
million in tax benefits because you didn't have to pay capital 
gains on $500 million worth of stock. Right?
    Mr. Paulson. I would strongly disagree with that because--
    Mr. Burton. Well, that is what has been reported.
    Mr. Paulson. Let me just----
    Mr. Burton. Well, it is OK. You can respond. I will send a 
question to you in writing.
    Mr. Paulson. OK.
    Mr. Burton. The concern I have is the same concern Mr. 
Stearns has. You came before our Caucus very nervous, saying, 
oh, my gosh, the sky is falling. We have to come up with this 
money very, very quickly. You actually were visibly nervous 
when you came before our Caucus. And then we have this bailout 
of AIG, and you don't know anything about it. Mr. Geithner had 
nothing to do with it.
    It just really boggles the mind that some of the biggest 
people involved in this whole thing from beginning to end had 
nothing to do with it. They didn't know. It makes you want to 
think that some clerk someplace was making these decisions. I 
don't think anybody is going to buy that.
    You and Mr. Geithner and others were directly involved in 
making this decision, were you not?
    Mr. Paulson. Of course we were directly involved, and I 
said it in my testimony. I heard Mr. Geithner's testimony. I 
heard him say the same thing. I was very supportive of that 
decision to prevent the failure of AIG.
    Chairman Towns. The gentleman's time has expired. I yield 
to the gentleman--who is next on my side? Mr. Lynch.
    Mr. Lynch. Thank you, Mr. Chairman.
    Chairman Towns. Two minutes.
    Mr. Lynch. Right.
    Mr. Secretary, I need to make this happen in 2 minutes. You 
were centrally involved with the negotiations regarding Bear 
Stearns when you insisted on a very, very low price on the part 
of the Bear Stearns shareholders in order to protect the 
taxpayer. It has been reported that you were very supportive of 
a $2 a share price in order to protect the taxpayers' interest.
    And yet in this situation with AIG, and you were the CEO of 
Goldman Sachs back in 2006. There was a longstanding 
relationship there between AIG and Goldman Sachs that you were 
well aware of. Goldman Sachs was a major counterparty on a lot 
of these credit default swaps with AIG when you were the CEO at 
Goldman, and that relationship continued after you left.
    You would have known that these people were--that Goldman 
was exposed here with these credit default swaps when the money 
went from the taxpayer to AIG and through to your former 
    And I guess the question that everybody has here is why, 
when you insisted on Bear Stearns taking a big haircut, why did 
you allow Goldman to be reimbursed, your former company, at 100 
cents on a dollar in that situation? Why did you not weigh in 
on behalf of the taxpayer?
    Mr. Paulson. As I have said on a number of occasions, I did 
not know. I had no knowledge of the size of the claim of any 
bank and I had no involvement in a decision to make payments to 
the counterparties. None whatsoever. I was very supportive of 
the rescue of AIG because a failure of that company would have 
been disastrous.
    Mr. Lynch. Especially to Goldman Sachs.
    Chairman Towns. The gentleman's time has expired.
    Mr. Lynch. It would have been disastrous to the American 
    Chairman Towns. The gentleman's time has expired. And I 
yield 2 minutes to the gentleman from Ohio, Mr. Jordan.
    Mr. Jordan. Thank you, Mr. Chairman.
    Mr. Paulson, I want to clarify the chain of events 
surrounding the original request for the TARP dollars, original 
request to Congress. You came to the Congress, everyone on this 
committee, I think everyone in Congress, would admit you came 
to us in September and said, we need the money to buy troubled 
assets, toxic assets.
    As everyone knows, at some point you changed your mind. 
When did you change your mind and decide you weren't going to 
purchase the troubled assets, you were going to inject capital 
into the banks? When did that happen?
    Mr. Paulson. I changed my mind. I came to Congress on 
September 18th.
    Mr. Jordan. Congress first voted it down. October 3rd, we 
voted for it. When did you change your mind?
    Mr. Paulson. It was our strategy when I came to Congress to 
buy illiquid assets, purchase illiquid assets.
    Mr. Jordan. When? We have 2 minutes. When did you change 
your mind?
    Mr. Paulson. Two weeks went on, and it was by the time----
    Mr. Jordan. Before the vote on October 3rd or after the 
vote? When did you change your mind?
    Mr. Paulson. I had begun considering putting capital into 
the banks as one option as we got near the final vote, but I 
had not changed my mind yet on the strategy. And I will say one 
other thing to you, right up even after we put capital in the 
banks, which we were forced to do by changing circumstances----
    Mr. Jordan. Did you change your mind before the vote or 
after the vote, because we have the interchange----
    Mr. Paulson. I changed my mind after the vote because I did 
not change--could I just say this? I did not change my mind on 
purchasing illiquid assets until mid to late October after we 
put the capital in.
    Mr. Jordan. Just so I am clear, you are saying you didn't 
change your mind until after the vote. I want to point to this, 
the book, David Wessel's book that came out, In The Fed We 
Trust, page 226, 227, and you have just been given a copy of 
what it says. The House of Representatives rejected the Bush 
administration's bank rescue plan on the 29th of 2008. The next 
morning, Mr. Paulson ran into Michele Davis, the spokeswoman 
and policy coordinator in the Treasury Building. ``I think we 
are going to have to put equity in the banks,'' he said, 
despite what Paulson had told Congress, buying toxic assets was 
going to take too long. Davis gave him a blank stare, ``we 
haven't even gotten the bill through Congress,'' she remembered 
thinking. ``How are we going to explain this?'' she told her 
boss. ``We can't say that now.'' He took the advice.
    So again, I am asking you, was it before or after, because 
you have said two different things. You said I started thinking 
about it, but you said I didn't make the decision until after, 
but you sold the Congress on the simple fact that you were 
going to buy the troubled assets. That is why they needed the 
    Mr. Paulson. If you would let me----
    Mr. Jordan. And your spokesman directly contradicts that.
    Mr. Paulson. Congressman, let me answer the question. Give 
me a minute to answer the question.
    During that period, when Congress was acting, the situation 
worsened considerably. As we got near the final vote, it was 
beginning to be clear to me that we were going to need to think 
through other options. But long after, even after we put 
capital in the banks, OK, even after----
    Mr. Jordan. Did you express that concern to the Congress?
    Chairman Towns. The gentleman's time has expired.
    Mr. Paulson. Let me finish it. Even after we put capital in 
the banks, it was still my intent to proceed with an illiquid 
asset purchase program until we got into late October.
    Mr. Jordan. Let me ask you one question.
    Chairman Towns. I am sorry, the gentleman's time is 
    I now yield 2 minutes to the gentleman from Maryland, Mr. 
Van Hollen.
    Mr. Van Hollen. Thank you, Mr. Chairman.
    Thank you, Mr. Paulson, and I accept your testimony that 
failure to act and to enact a financial rescue plan would have 
led to, as you said, economic disaster.
    When you and President Bush came before the Congress in an 
emergency, you submitted a plan that did not include at the 
time a mechanism to make sure that the taxpayer would recoup 
any dollars that had been extended to the financial sector.
    The Congress at that time inserted a provision requiring 
the President, whoever that President may be, to submit a plan 
to recover those funds on behalf of the taxpayer. President 
Obama has now done that in proposing a fee.
    And my question to you is, do you agree that, given 
everything that taxpayer did to save the financial industry, 
that in addition to taking measures to prevent this from 
happening in the future, we should also make sure that we put 
in place a mechanism to recover the moneys that went to Wall 
Street and other financial banks as part of the rescue?
    Mr. Paulson. I do agree with that, but the provision that 
was put into the TARP legislation envisioned, contemplated 
looking at a 5-year window, and at the end of the 5-year time 
period, if the taxpayer hadn't recovered the money, then there 
was going to be a tax.
    Now, today, as I look at the circumstance, the money is 
going to come back from the banks, in my judgment, with a 
profit to the taxpayer. And it is too early to tell about to 
what extent the money is going to come back from the rest of 
the program. I frankly think that the taxpayers will end up 
being pleasantly surprised and much more will come back.
    So my only question about the tax that is being suggested 
is, is it too soon to make that judgment, No. 1. But most 
importantly, I don't want that to take our focus off of dealing 
with what is the real problem. We better fix this system so it 
doesn't happen again.
    Mr. Van Hollen. But would you agree there should be a 
mechanism in place to ensure that at the end of the day, the 
taxpayer recoups 100 percent of the TARP moneys?
    Mr. Paulson. Yes, that was the intent of Congress and I 
think that is the right thing to do. I agree.
    Mr. Van Hollen. Thank you. Thank you, Mr. Paulson.
    Ms. Norton [presiding]. Thank you, Mr. Paulson.
    Mr. Paulson. Madam Congresswoman.
    Ms. Norton. Yes?
    Mr. Paulson. I had agreed to stay for another 8 minutes. It 
has been 10 minutes.
    Ms. Norton. For that reason, I dismiss the gentleman who 
had the time to tell him his time had passed, and for the 
committee, and especially for Chairman Towns, may I thank you 
for not only 8 minutes, but 10 minutes.
    Mr. Paulson. Thank you. Thank you. [Laughter.]
    Ms. Norton. We would like to call the third panel.
    Our final witnesses for today's hearing are Neil Barofsky, 
the Special Inspector General for TARP; Thomas Baxter, who is 
general counsel and executive vice president of the Federal 
Reserve Bank of New York; Elias Habayeb, the former chief 
financial officer of the Financial Services Group of AIG; and 
Stephen Friedman, the former chairman of the Board of Directors 
of the Federal Reserve Bank of New York, and current member of 
the Board of Directors of Goldman Sachs.
    May I ask the witnesses to stand while I administer the 
    [Witnesses sworn.]
    Ms. Norton. Let the record reflect that the witnesses have 
answered I the affirmative. You may now be seated.
    I will ask the witnesses to summarize their testimony in 5 
minutes. The yellow light means you have a minute left. The red 
light means stop.
    And then, of course, we will have time for questions from 
    All the witnesses have opening statements, so I believe 
that given the four votes, that Members will be back by the 
time your statements are done, for questions. I thank you.
    Mr. Barofsky, would you present your testimony first?



    Mr. Barofsky. Thank you, Madam Chair.
    It is an honor to once again be back testifying before this 
committee. I would like to thank this committee for the support 
it has shown our office, as well as its leadership and tenacity 
in bringing about transparency to the AIG bailout generally, 
and in particular to the counterparty payments.
    This past November we issued our audit, an audit that was 
requested by Representative Cummings and 26 other Members of 
Congress, including members of this committee, reporting on the 
decisionmaking process that led to then-President Geithner and 
the Federal Reserve making the decision, the choice to pay 100 
cents on the dollar, effectively par value, for a series of 
securities that at the time were worth less than half of that 
    And as we demonstrate in the audit, that was in fact a 
choice, a series of policy choices that were made that limited 
the ability of the Federal Reserve in its negotiations, and a 
choice to conduct the negotiations in the way that they did.
    And in our audit and in our testimony, we lay out the 
different justifications and explanations given by the Federal 
Reserve, many of which Secretary Geithner repeated this 
morning, and our responses, and in some cases our criticisms of 
those policy decisions.
    What I would like to focus on today, though, is expanding a 
different theme in the audit, and that is looking at the tone 
and the amount of effort that went into those negotiations, 
even assuming all those policy decisions which restricted the 
latitude of the Federal Reserve.
    How are those negotiations conducted? Well, essentially a 
number of mid- and senior-level executives at the FRBNY reached 
out to their counterpart at AIG's counterparties. They did this 
basically over the telephone, and after informing them that 
even the negotiations themselves were voluntary, they asked if 
they would be willing to take a haircut on the amount of 
concession. For seven of the eight, the answer was ``no.'' For 
the eighth, UBS, the answer was ``yes'' so long as the other 
counterparties also agreed to a similar concession.
    The Federal Reserve at that point decided to shut down 
negotiations; not to pursue that willingness to negotiate; and 
decided with the approval of Secretary Geithner, to pay 100 
cents on the dollar. Now, this stands in stark contrast to a 
negotiation that occurred just a few weeks earlier. And this, 
of course, was the negotiation by which the government 
purchased $125 billion of preferred securities from the nine 
largest institutions as part of the TARP's Capital Purchase 
Program. There, unlike in AIG, it was the principals that were 
involved: President Geithner, Secretary Paulson, and Chairman 
Bernanke on behalf of the government. And on behalf of the 
counterparties: the banks--some of the exact same banks that 
were subject to the AIG discussions--and the chief executive 
officers. There, unlike in AIG, the conversations weren't 
conducted over the telephone. Each of those CEOs was summoned 
to Washington and told to appear in a Treasury conference room, 
gathered together. And there, unlike in AIG, the message was 
forceful. President Geithner, Chairman Bernanke, Secretary 
Paulson and others, made it very clear of the importance that 
they believed that this negotiation was; how important it was 
for the banks to agree. They used the terms like ``that it 
would be good for the country for them to do so.''
    No such similar effort was taken with respect to the AIG 
negotiations, and the result of the Capital Purchase Program: 
100 percent agreement. The result of the AIG, as we all know, 
were failed negotiations.
    Now, would it have made a difference if President Geithner 
or Secretary Paulson got on the phone and talked to those chief 
executive officers? Would it have resulted in the savings of 
billions or tens of billions of dollars for the taxpayer? We 
don't know. We can't know. But we do know, because we have 
recently been informed by the French regulator, the same 
regulator that the Federal Reserve cited their intransigence as 
being one of the great barriers to achieving effective 
negotiated haircuts, that recently told SIGTARP that in fact 
they would have been willing to engage in just such a 
negotiation, so long as it was at a very high level, so long as 
it was completely transparent, and as long as it was universal 
agreement, everyone came around the table.
    And we also know that if such negotiations occurred and 
were successful, they would have addressed all of the concerns 
that Secretary Geithner addressed this morning, and many of the 
concerns that are outlined in our audit of concerns by the 
Federal Reserve. But we will never know because that effort was 
simply not taken.
    Madam Chair, our audit covers, I see my time is running 
low, our audit obviously covers a lot of other issues, as does 
our testimony, including some of the recent troubling comments 
from Treasury that impact transparency, and of course, I will 
be available to answer any questions that you or other Members 
of the committee may have.
    Thank you.
    [The prepared statement of Mr. Barofsky follows:]

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    Ms. Norton. Thank you, Mr. Barofsky.
    Mr. Baxter, we would like you to go next.


    Mr. Baxter. Good afternoon, Madam Chairman Norton, Ranking 
Member Issa, and other Members of this committee. Thank you for 
inviting me to appear here today.
    As the general counsel of the Federal Reserve Bank of New 
York, I welcome the opportunity to talk about the Federal 
Reserve's work to stabilize AIG at a critical point. I will 
also address the role played by the Federal Reserve Bank of New 
York in securities disclosures made by AIG.
    Let me begin with just a few words about autumn 2008, when 
our Nation was challenged by a financial crisis of a kind we 
had not seen since the Great Depression. At the New York Fed, 
we were literally working around the clock trying to implement 
a number of liquidity programs directed toward market 
    Today, we consider some of the actions taken during those 
frenetic times with respect to AIG. Everything we have done 
since this crisis began has been with the goal of stabilizing 
our financial system and assisting our economic recovery.
    Turning to September 2008, and the actions taken by the New 
York Fed, the Board of Governors of the Federal Reserve System, 
and the Department of the Treasury, they were designed to avoid 
the catastrophic systemic consequences that would have resulted 
from an AIG bankruptcy. Every American would have been 
adversely impacted. We did not lend to AIG because we wanted 
to, but because we had to. A decision not to act might have 
been easier on us, but it would have been worse for all.
    Now, I will turn to the specific issues that bring me here 
today. First, there have been concerns about AIG's 
counterparties receiving large payments for terminating CDS 
contracts and selling collateralized bid obligations. There 
have been allegations that this was a backdoor bailout designed 
by the Federal Reserve to assist the banks at the expense of 
the American taxpayer.
    These allegations are not true. AIG was scheduled to 
announce an earnings loss of nearly $25 billion on November 10, 
2008. Had we not reached agreement with the counterparties to 
terminate their credit default swap contracts by that date by 
acquiring the CDOs, AIG would have been downgraded by the 
credit rating agencies and thrown once again to the brink of 
bankruptcy. This would have returned us to the situation we 
faced in September and required even further government 
support. We took the action needed to terminate the CDS 
contracts by the deadline, and our focus was on solving the AIG 
liquidity problem, not on benefiting AIG's counterparties.
    Second, I would like to clarify the misunderstanding that 
the Federal Reserve and Treasury Department received nothing of 
value in exchange for the payments to AIG's counterparties. As 
part of the termination deal, the Federal Reserve, through its 
special purpose vehicle, Maiden Lane III, paid approximately 
$29 billion and received assets with a fair market value of $29 
billion. The par value of the assets was approximately $62 
billion. Today, the value of the assets which secure the 
Federal Reserve's loan exceeds our loan balance by several 
billion dollars.
    Third, concerns have been expressed about our involvement 
in AIG's securities disclosures. In particular, there have been 
allegations that we somehow tried to engage in a cover-up by 
recommending that AIG strike certain sentences in its SEC 
disclosures related to the payments to the counterparties. 
These allegations are not true. Our sole purpose was to ensure 
that securities law disclosures by AIG were accurate and 
appropriately protective of taxpayer interests.
    Let me finish by thanking the committee for holding this 
hearing. We submitted an extensive statement yesterday and we 
have delivered 250,000 pages of documents to you. I believe 
that upon careful examination, the committee will see that our 
actions successfully addressed a potentially calamitous risk to 
the economy, and in doing so, protected the interests of the 
American people.
    [The prepared statement of Mr. Baxter follows:]

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    Ms. Norton. Thank you, Mr. Baxter.
    Mr. Habayeb, we are ready for your testimony.


    Mr. Habayeb. Madam Chairman, Ranking Member Issa, Members 
of the committee, thank you for the invitation to appear before 
you today.
    From September 2005 until May of last year, I was senior 
vice president and chief financial officer of the Financial 
Services Division at American International Group. I left AIG 
in May 2009 on excellent terms and continue to provide advisory 
services to the company while I plan the next phase of my 
    By way of additional background, I am a licensed CPA and 
practiced with Deloitte and Touche, becoming a partner in 2003.
    My position with AIG gave me some insights into Maiden Lane 
III. Maiden Lane III, LLC, is a financing entity created by the 
Federal Reserve Bank of New York. The entity helped facilitate 
the unwinding of a significant portion of AIG financial 
products' credit default swaps by purchasing the underlying 
multi-sector CDO bonds from F.P. swap counterparties. At the 
same time, the related swaps were terminated.
    I understand that the committee is interested in learning 
more about these transactions. These transactions were critical 
to AIG. They significantly reduced the risk of substantial 
collateral postings to counterparties that F.P. was required to 
make under the swaps. They also reduced the erosion to AIG's 
capital from mounting mark-to-market losses on the swaps.
    A little history is helpful. During the subprime mortgage 
crisis, the bonds underlying F.P. swaps began to decrease in 
value. As a result, beginning in late 2007 through 2008, F.P. 
reported billions of dollars of mark-to-market losses on the 
swaps under the fair value accounting rules. F.P. also posted 
billions of dollars in collateral to its swap counterparties as 
a result of the declining market value of the bonds and 
declines in AIG's and the referenced bonds' credit ratings.
    AIG lacked the financial resources to come up with a large-
scale solution. Because AIG is not a bank, it did not have 
access to funding through the Federal Reserve in the normal 
course. Instead, AIG had to rely on the capital markets.
    By the beginning of September 2008, the collateral postings 
and the mark-to-market losses, along with other factors, were 
straining AIG's liquidity, but AIG was not able to access the 
capital markets. On September 15, 2008, the rating agencies 
downgraded AIG, triggering an onslaught of new collateral 
    Even after the Federal rescue on September 16, 2008, AIG 
still needed to reduce its exposure to the mark-to-market 
losses and collateral calls on F.P. swaps. The Federal rescue 
did not stop these losses or payment obligations. This is what 
led to the creation of Maiden Lane III.
    Under the terms negotiated by the New York Fed with the 
swap counterparties, Maiden Lane III bought the underlying 
bonds at the then-market value. Specifically, Maiden Lane III 
purchased approximately $62 billion notional amount of bonds 
underlying F.P. swaps for a market value of $29 billion. 
Separately, F.P. agreed to terminate the swaps for an amount 
equal to the difference of the bonds' notional par value and 
its market value. The collateral that F.P. had posted to date 
was used to pay the cost of terminating the swaps. 
Specifically, F.P. paid the counterparties approximately $33 
billion in previously-posted collateral to tear up the swaps. 
So the counterparties ended up with par, a total of 
approximately $62 billion.
    To conclude, Maiden Lane III was critical in mitigating 
AIG's continued exposure to the significant mark-to-market 
losses and collateral calls on the swaps that was draining 
AIG's capital and liquidity.
    I am happy to answer any questions the Members of the 
committee may have.
    Thank you.
    [The prepared statement of Mr. Habayeb follows:]

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    Ms. Norton. Thank you very much, Mr. Habayeb.
    Mr. Friedman.


    Mr. Friedman [Remarks off mic]. As indicated in my prepared 
statement, I have little factual information to offer in 
response to the questions set forth in the committee's 
invitation for me to testify. The explanation for my lack of 
involvement in the New York Reserve Bank AIG counterparty 
transactions requires an appreciation of the limited role that 
a Reserve Bank's chairman and Board of Directors play in a 
Reserve Bank's operation.
    A Reserve Bank's Board of Directors is really more akin to 
an advisory board. It is actually sort of a hybrid, more akin 
to that than it is to the Board of Directors of a typical 
corporation. Reserve Bank Directors serve part-time, make 
observations on the economy and markets, make recommendations 
on monetary policy, and approve the bank's budget, internal 
controls and policies and procedures, and personnel matters.
    But consistent with the structure created by the Federal 
Reserve Act, the Directors of the 12 Federal Reserve Banks have 
no role in the regulation, supervision, or oversight of banks, 
bank holding companies or other financial institutions. Such 
responsibilities, including the extraordinary financial 
interventions of 2008, are instead carried out by the officers 
of the 12 regional Federal Reserve Banks acting at the 
direction and with the oversight of the Board of Governors of 
the Federal Reserve System in Washington. In other words, the 
Board of Governors in Washington effectively is the Board of 
Directors for Reserve Bank undertakings such as the AIG 
financial rescue transactions.
    Accordingly, as I explained to committee staff and 
consistent with the Fed's ground rules, whether as chairman of 
the New York Federal Reserve Board or otherwise, I was not 
involved in the decision to bail out AIG, the decision to repay 
the AIG counterparties at par, or the decision not to publicly 
disclose those counterparties' names. I did not ratify those 
decisions and I do not know just who made those decisions.
    I am advised that on the evening of November 9, 2008, the 
Chair of the bank's Audit Committee and I received a telephonic 
summary briefing from bank officials about the transaction. At 
that point, the deal had been signed up and was to be announced 
by the Board of Governors the next morning.
    Finally, I would note that by statutory design, the Boards 
of the Reserve Banks are comprised of members with 
intentionally diverse financial interests and affiliations, 
such that the Directors' recommendations and advice on monetary 
policy include input from a diverse array of bankers, 
borrowers, and community leaders.
    Because the Boards, once again by statutory design, include 
bank executives and bank shareholders, many current Directors 
would have conflicts of interest if the Reserve Bank Boards of 
Directors also had any authority over, or any role in, 
individual supervisory matters like the New York Reserve Bank's 
rescue of AIG and the AIG counterparty transactions. But the 
New York Reserve Board does not have such authority, and it and 
I were walled off from these matters--really ring-fenced.
    I stand ready to answer any questions the committee may 
    [The prepared statement of Mr. Friedman follows:]

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    Ms. Norton. Thank you, Mr. Friedman.
    Let's begin with Mr. Baxter.
    Mr. Baxter, the committee notes that you have said publicly 
on a number of occasions that AIG, and not the Federal Reserve 
of New York, had the final say on disclosures. The committee 
has, however, in its possession an email, I believe it is up 
there on the display, that was obtained by subpoena. It 
involves a senior person in your office, and the words said 
are, ``any public disclosure by AIG was still subject to FRS 
approval,'' Federal Reserve Service approval. That sounds 
pretty much like the Federal Reserve has the final approval 
with that kind of statement.
    If what you say about AIG having the final decision is 
true, why did a top New York Fed employee say that the final 
approval, in effect, rests with the Federal Reserve?
    Mr. Baxter. Madam Chairman, as I look at that email, I 
don't see it being addressed to me. So I will have to speculate 
as to why the author of that email----
    Ms. Norton. Who do you think it was addressed to, Mr. 
Baxter? You know, you don't just send emails in the air.
    Mr. Baxter. I can't read it well enough, Madam Chair, to 
tell you, but it doesn't look like it is addressed to me. Madam 
Chair, I am willing to speculate, though.
    Ms. Norton. Well, since you raised the issue of who it is 
from, Steven Massari to Sarah Dahlgren. It is your top people. 
Your proxies speak for you, do they not?
    Mr. Baxter. They are not only very, very senior people. 
They are also very diligent people. And with respect to the 
email, Madam Chair, it doesn't refer to securities disclosure. 
It refers to a public disclosure by AIG, so I would point that 
out as one item.
    With respect to AIG's securities disclosures, those are 
AIG's legal obligations under our securities laws, given that 
AIG was then and is now a publicly traded company. So in the 
first instance, AIG has a responsibility to comply with our 
securities laws. And that is the starting point.
    Now, it is true that AIG shared its securities law 
disclosures with the Fed. And it is true that the Fed commented 
on those draft securities law disclosures of AIG. Our purpose 
in making those comments was twofold: first, to assure 
accuracy; and second, to protect the taxpayer interest. But at 
no point, Madam Chair, did we ever interfere with a mandatory 
obligation of AIG to report to the SEC in a securities filing. 
It was always for the two interests that I mentioned, the 
interest of accuracy and the interest of protecting the 
taxpayer interest that we commented on AIG's public 
    Now, it could not----
    Ms. Norton. Board approval is a very troubling word here. 
It implies what it says.
    Mr. Baxter. It is, Madam Chair, and it could not be for an 
AIG public filing and approval because that legal obligation 
with respect to AIG's securities filings as a public company is 
AIG's. It cannot be delegated to someone else.
    Ms. Norton. Agreed.
    Mr. Baxter. Not even someone at the----
    Ms. Norton. Agreed, but it looks, though, it looks as 
though a very powerful agency was saying otherwise. I agree 
with what you say, but that is not what the email said. Perhaps 
you can see why it makes it look as though the Federal Reserve 
of New York is not being up front with the American people here 
behind the scenes where these emails that put the Federal 
Reserve in a position that you yourself indicated is not a 
position it can have under law.
    Mr. Baxter. Correct.
    Ms. Norton. Mr. Barofsky, perhaps you can help me. I am 
sitting here listening to this testimony and I still cannot 
understand. I need to understand, for a moment put yourself in 
the position of the parties, why you think AIG's counterparties 
were paid 100 cents on the dollar?
    Mr. Barofsky. Well, I think that, you know, it is hard to 
put myself into the shoes of either the counterparties or the 
Federal Reserve, but my understanding of the discussions, I 
certainly understand why the counterparties wanted to be paid 
100 cents on the dollar.
    Ms. Norton. Of course, but why would the government want to 
do that? I mean, you cannot assume in a situation like this 
that somebody wants to do evil or to cheat the taxpayers. We 
are trying to find, get beneath the appearance, trying to place 
ourselves at the table with the parties, including the 
government, including the Federal Reserve, including AIG.
    So you yourself in your testimony lay out what had just 
occurred. Why would that procedure not be used?
    Mr. Barofsky. I cannot give you an answer to that question. 
I think that if that effort and that tone were there, Mr. 
Baxter could answer that question. Probably Secretary Geithner 
could best answer that question.
    Ms. Norton. Well, I mean, again, if you have to assume the 
best and not the worst, then what would be the best reason for 
not using the Government's bargaining power?
    Mr. Barofsky. I really cannot imagine. I think that, again, 
accepting the policy limitations that they imposed upon 
themselves--and we don't accept them necessarily in the audit--
but even accepting them, it seems to me that taking the 
effort--apparently, Secretary Geithner at the time was 
frequently speaking to the CEOs of many of these 
counterparties. It seems that just putting a little extra 
effort in trying to communicate the importance of this. I mean, 
negotiations were ongoing. It is not as if, as somebody may 
think, that they made no effort in negotiations. There was some 
effort negotiating.
    Ms. Norton. So there was effort, so, you know, when you say 
that they said, ``would you accept 100 cents on the dollar, 
less than 100 cents on the dollar,'' why, anybody would answer 
``no'' to that question.
    Mr. Barofsky. The surprising thing is that one of them did 
answer ``yes,'' and that wasn't----
    Ms. Norton. And why do you think he answered ``yes'' and 
the others answered ``no?''
    Mr. Barofsky. I think they were willing to negotiate 
because I think that, you know, if you look at it from----
    Ms. Norton. Did he know the others had answered ``no?''
    Mr. Barofsky. Well, he said ``yes'' only as long as all the 
others would say yes. So his idea was that we would do----
    Ms. Norton. Well, why didn't he stick with the others? I 
mean, there must have been some--Mr. Baxter?--why would--you 
know, if you see that there is solidarity here and maybe you 
can get the government where you want it, why would one person 
say yes? He must have known something. He must have felt 
something for the country? Did he feel something for the 
economy that made him do it? Is he a patriot and the others 
    Mr. Barofsky. I think that there was, you know, this was 
UBS, and I think there probably was a recognition that the 
Federal Reserve had done so much for the global economy, and 
the American taxpayer--putting the American taxpayer who had 
literally taken the entire global economy on its back and was 
supporting not just the U.S. institutions, but the global 
systemic risk that the sacrifices the taxpayer had made.
    And that, I think, is a powerful argument in the context of 
negotiations if it is made clear how important it was to the 
American decisionmakers, to the principals. And I think that 
perhaps, I don't want to crawl into the mind of the UBS, but 
there was a willingness to engage in these discussions, but as 
long as all the others. And because seven of the eight had said 
no, the Federal Reserve essentially shut down those 
    But I think it is a very fair question to say why not do 
something similar to what was done just a couple weeks before 
in Washington with respect to the Capital Purchase Program, 
which is, again, those were not compelled transactions, it was 
ultimately a voluntary transaction, but the negotiations, if 
you will, were conducted in a very, very forceful manner that 
made it very clear that this was an issue of national 
    Ms. Norton. So I would ask you the same question, Mr. 
Baxter. One of the reasons I feel so angry at the banks and at 
the government is that this is a commonsense question that 
anybody would ask without being very learned or very practiced 
in negotiations. So could you give us your answer?
    Mr. Baxter. And I think, Madam Chair, this is a key 
question. The key question is, why didn't the Federal Reserve 
act successfully to get a concession of perhaps----
    Ms. Norton. Is your mic on, sir?
    Mr. Baxter. I think it is.
    Why weren't we successful in getting a concession from the 
counterparties? Why wasn't AIG successful in getting a 
concession from the counterparties, because that was the 
situation? And it is related to bargaining power.
    Now, typically when a debtor is trying to restructure a 
debt with a creditor, the bargaining power that the debtor 
gets, Madam Chair, is from the threat of bankruptcy. This 
negotiation with the counterparties was taking place in the 
fourth week of November 2008. So how would the threat of 
bankruptcy have played during that particular period of time? 
And of course, Madam Chair, you know that the Federal Reserve 
had already interceded to save AIG from bankruptcy on September 
16, 2008, only 6 weeks before.
    So what about the bankruptcy threat? And I have three 
responses. First, that threat was not credible, given the 
actions of September 2008. Second, that threat of bankruptcy 
was not true. We were not prepared to put AIG into bankruptcy 
in November 2008, and we don't misrepresent situations in 
negotiations at the Federal Reserve.
    Ms. Norton. But the threat was there. Excuse me. The 
difficulty and the bargaining positions were there. So I still 
don't understand why ask a simple question didn't proceed, with 
business as usual, as if you weren't holding that threat card.
    Mr. Baxter. And I am trying to explain exactly why we had 
no bargaining power with respect to the bankruptcy risk. The 
first is it wasn't credible. The second is it wasn't true and 
it would have been unethical for us to suggest otherwise. And 
the third is it would have been counterproductive because the 
biggest threat we were facing at that point was the threat of 
the credit rating agencies downgrading.
    Ms. Norton. Mr. Baxter, I understand that nuclear bomb 
threats are not credible. And I can understand your argument as 
to the insolvency.
    Mr. Barofsky, now, it is true that when you comment and you 
tell somebody, you know, you are going to kill them, and you 
know for sure that you are not, and they know for sure you are 
not. Then the question becomes, what is the next step after the 
nuclear bomb threat?
    Mr. Barofsky. I think there are two things. First of all, 
what I was suggesting, that the principals got involved in 
negotiation. I wasn't suggesting that they threaten bankruptcy. 
My comparison to what happened a couple of weeks earlier was, 
again, presuming all the restrictions that Mr. Baxter and 
Secretary Geithner had put on themselves, including not wanting 
to threaten bankruptcy. So first of all, I think that what I 
was, when drawing this comparison, I wasn't suggesting that 
they do.
    As to the complete absence of leverage, again, I think you 
have to look at this in the context of what the situation was, 
what the position of U.S. Government officials explaining how 
important this was, much like they had 2 weeks earlier. And I 
don't think that they needed to threaten bankruptcy.
    However, as Secretary Geithner noted this morning, there 
was a very serious concern at the Federal Reserve and in the 
markets that there was going to be a downgrade of AIG, a 
downgrade that Secretary Geithner and the Federal Reserve have 
indicated to us, would have resulted in AIG going into 
bankruptcy despite the best efforts of the Federal Reserve. 
There is a limit on how much money, perhaps, the Federal 
Reserve was willing to print at some point if bankruptcy was 
    And I think that, again, without threatening bankruptcy, I 
think that if there was a negotiation, if everyone was in the 
room, the Federal Reserve could point to the fact that there is 
a possibility of a downgrade. They could point to what the 
market was treating AIG's debt at the time. The credit default 
swaps were through the roof. There was fear in the market that 
AIG would default. And again, without threatening the 
bankruptcy, could point out the fact that if there was not a 
resolution, if they didn't agree to a haircut, it may be 
difficult for the Federal Reserve to get Board approval, for 
example, to pay 100 cents on the dollar. They had not yet 
received that approval.
    What I am saying is that there is a whole different range 
of options in that negotiation that could have occurred had 
they simply brought everyone in the same room and if it was 
made a priority, if there was a level of effort across the 
    I can't tell you if it would have worked. I have no idea if 
it would have worked.
    Ms. Norton. Well, have you ever heard 100 cents on the 
dollar being given in the kind of situation like this? Isn't 
that rare as a way to come forward when you see a desperate 
situation on the other side? Surely, some gradations down from 
that were in order.
    And I guess I should ask Mr. Baxter. The puzzling thing is 
to come up with 100 cents on the dollar without proceeding 
through some other process until you maybe had to get there. We 
don't see, the committee does not see how you--and is bothered 
by the spontaneous nature of the acceptance of the notion that 
the government had to pay 100 cents on the dollar. We have 
hardly heard of a negotiation in our lifetime when that is what 
two unequal parties at the table end up doing, no concession, 
100 cents on the dollar.
    So perhaps you can tell us why what Mr. Barofsky says at 
least some sense, yes, of course, you are not going to put them 
into bankruptcy. We do not question nearly as much the bottom 
line here as we question how you got to that bottom line.
    Mr. Baxter. Well, because we couldn't use the threat of 
bankruptcy, Madam Chair, one question was could we use our 
regulatory or supervisory power? And we considered the answer 
to that question ``no,'' because that would have been an abuse 
of our power. And the reason we felt that is it wasn't using 
the supervisory power with respect to an institution to get it 
to do something to enhance its safety and soundness, for 
example, like raise more capital.
    If an institution doesn't do that, and it is appropriate if 
the Fed believes there is insufficient capital to use a promise 
or a threat perhaps of enforcement action to induce the 
institution to take that action, that was not the case here. 
Here, the suggestion is we use our regulatory power to cause a 
counterparty to give up property in the form of a concession.
    So it is not using the regulatory power for the purpose 
intended by law. It is using the regulatory power as a promise 
or a threat to extract money from someone. And that raises all 
kinds of considerations that are not consistent with the rule 
of law.
    And just another point, Madam Chair.
    Ms. Norton. You apparently didn't think you had to change 
the regulatory power in order to deal with Bank of America. 
Somehow you would have to go back, change the law in order to 
deal with AIG.
    Mr. Baxter. Well, Madam Chair, remember what happened when 
we asked the two French banks, SocGen and Calyon, if they would 
give a concession. Their first answer was no, and then they 
were supported in that negative answer by the French Banking 
Commission. So that happened with the two French banks.
    You also asked earlier about UBS. Now, UBS said, ``we might 
consider as much as a 2 percent concession, but only if 
everyone does it, everyone else does that as well.'' And so 
there was a fairly effective blocking action there by UBS.
    Now, on the point that participating in the benefits of all 
of the Federal Reserve's and the Treasury's action in combating 
the financial crisis, with respect to UBS, Madam Chair, 
remember UBS had already been rescued by Switzerland in the 
financial crisis.
    So again, in UBS, we are dealing with UBS. We asked them if 
they would consider a concession. You know what their answer 
is, but it is a hard case to make that they owed the United 
States a favor when Switzerland had already come to their 
    Ms. Norton. Thank you, Mr. Baxter.
    I am going to move now, since I have had more than the 
allotted time because it took you all so long to get back, I am 
going to move to the ranking member.
    Mr. Issa. I thank the chairwoman, and I certainly think 
that this was a good case for your not necessarily wanting a 
floor vote today.
    Ms. Norton. But not tomorrow.
    Mr. Issa. But not tomorrow.
    Thank you, Madam Chair.
    Mr. Baxter, I didn't know who you were after 30 years of 
loyal service until a few days ago, so forgive me for maybe now 
playing total catch-up. Your old boss, now-Secretary Geithner, 
spoke glowingly about the staff and the hard work and the 
people involved. But we now believe and understand that a staff 
report was done within the Fed that said ``let AIG go 
bankrupt,'' and that was never, ever brought before the Board. 
In fact, Chairman Bernanke pulled it so it would not be 
considered by the broader Board of Governors.
    Are you familiar with that study or report?
    Mr. Baxter. I am not.
    Mr. Issa. You are not. So he kept it from a person who 
was--these emails show you were at the center of all of this. 
He kept from you his own staff's decision. Chairman Bernanke 
did not trust his own Governors or even the New York Fed's 
inner circle with a recommendation that said let them go 
    Does that surprise you?
    Mr. Baxter. First, ranking member, I am the general counsel 
of the New York Fed. The chairman----
    Mr. Issa. But all that question was in the New York Fed. It 
was a study on behalf of the New York Fed.
    Mr. Baxter. I don't know the study, and I am sorry I don't.
    Mr. Issa. OK. Well, with any luck and with the indulgence 
of the Chair, we will get discovery on that. As of right now, 
all I have is a whistleblower and one Senator who confirmed 
that it exists, but has said on CNBC that he can't release it, 
even though he thinks it is damning.
    Additionally, you are familiar with Schedule A of the 
documents. OK. So this unredacted form shows 57773 and some 
alpha numeric after that. It then shows that Deutsche Bank 
would be the counterparty recipient, the breakdown. Basically, 
these are sort of who owns the bonds, to put it in terms the 
American people would understand.
    Are you familiar with this document called Schedule A? It 
was delivered from the Fed.
    Mr. Baxter. This was Schedule A, the shortfall agreement?
    Mr. Issa. Yes.
    Mr. Baxter. Yes, I am familiar with that.
    Mr. Issa. Are you familiar with the cover-up that AIG, with 
the insistence of the Fed, clearly perpetrated by getting this 
made confidential and not disclosed to the public until 2018, 
that work continuing until may of this year, or last year?
    Mr. Baxter. Congressman, there was no cover-up. I can 
explain the processing of the Schedule A.
    Mr. Issa. Well, if you can just briefly tell me the first 
part, which is are you familiar with the work that went on to 
seal this from being disclosed in public SEC filings at least 
until 2018.
    Mr. Baxter. I am familiar.
    Mr. Issa. OK. And in a short way, do you think that is 
right or wrong?
    Mr. Baxter. I think all of the conduct was perfectly 
    Mr. Issa. OK. Well, I am going to leave that because 
although I don't agree, ultimately I just wanted that answer 
and we will see in time on other people.
    Can you put up slide 23 please?
    Can you please explain what happened following your receipt 
of an email from Marshall Huebner? And did AIG ever make this 
filing with the SEC?
    Mr. Baxter. Would you like me to explain?
    Mr. Issa. Please, as briefly as possible.
    Mr. Baxter. This concerned a salary increase for the chief 
financial officer of AIG, and Mr. Huebner was concerned about 
that salary increase. I was also concerned about that salary 
increase. And as a result of our collective concern, I had 
conversations with AIG, and the chief financial officer in 
question decided that he really did not want the salary 
increase at this time. The salary increase was withdrawn.
    Mr. Issa. OK. So by talking him out of it, it didn't have 
to show up in public filings, so it was no harm, no foul in 
this case?
    Mr. Baxter. It had nothing to do with the public filing. It 
had everything to do with we didn't think this was appropriate.
    Mr. Issa. OK.
    Mr. Baxter. The salary increase.
    Mr. Issa. A last question for you, and then I want to 
quickly go to the SIGTARP. Do you know of a compelling legal 
authority that would have prevented AIG from going bankrupt? In 
other words, did the Fed have the authority to let them go 
bankrupt? Because Secretary Geithner has implied that he didn't 
have any options and he didn't have the authority to do 
anything but what he did.
    That is pretty much ayes or no. Did you or anyone at the 
New York Fed, to your knowledge, in fact do a study or come up 
with a legal opinion that said you can't do anything else 
except let them go bankrupt or do this, and you can't let them 
go bankrupt?
    Mr. Baxter. First, we were not the supervisor of AIG on 
September 16, 2008, so we had no supervisory responsibility.
    Mr. Issa. No, no, but my question is since Secretary 
Geithner was there and said there was no other choice, your 
boss made the call. Do you know of a legal opinion that he was 
given or that exists today as to that?
    Mr. Baxter. Well, I was his chief legal officer, and I 
would say then what I say now, and that is we need a resolution 
statute in this country to deal with institutions as 
systemically significant as AIG. We didn't have that tool in 
September 2008 and we still don't have that tool, Congressman.
    Mr. Issa. OK.
    Mr. Baxter. And we really need it.
    Mr. Issa. But, you know, I am going to ask this for 2 
minutes, quickly, to sort of counter the very long time, but I 
will be very brief.
    Mr. Issa. I thank the chairman.
    Chairman Towns. [presiding]. I yield the gentleman 2 
    Mr. Issa. Mr. Barofsky, your report directly contradicts so 
much of what we are hearing from people that were there or are 
there as to whether we will get paid back. Let me break it down 
to just two questions, and then take the rest of the 2-minutes 
for your answer.
    One, is it true that we are just not going to get paid back 
by anyone's reasonable estimation certain funds? And two, had 
we used other means to underwrite AIG such as we will buy out 
that at a discount or we don't buy them? We will guarantee or 
give, or buy at discount, you decide whether you want our AAA 
rating versus actually getting the transfer at a time when 
these banks wanted a transfer?
    If any of these other techniques that you are now aware of 
that logically could have been used, would we be in as bad a 
situation of not getting paid back as we are?
    And then, please elaborate on what we are seeing of what we 
are not going to get paid back that flies, and that doesn't 
even include, by the way, the idea that the moneys come back 
and it is being re-spent in other ways. But just as to your 
knowledge, can you give us as much knowledge, as much time as 
we do have to answer that?
    Mr. Barofsky. Sure. Ranking Member, I just want to take the 
chance that is in my initial testimony to thank you and the 
chairman for your support of our organization and for the 
leadership and the tenacity that the two of you and this 
committee has shown in bringing transparency to the AIG 
bailout. The Treasury's own calculation is when they did their 
financial statement at the year-end, September 30, 2009, 
projected a more than $30 billion loss on its AIG investment.
    When you are looking at these counterparty payments, you 
can't look at just one part of them. They were basically in two 
chunks, if you will. There is the Federal Reserve loan to 
Maiden Lane III, which purchases securities. This is about $29 
billion. And the rest were counterparty payments, the balance 
of about $33 billion that AIG had previously made. So there is 
a total of about $62 billion.
    Now, with the chunks that the Federal Reserve lent to 
Maiden Lane III, that portion, which we have been hearing 
about, how that is on track to be paid back and the taxpayer 
may actually, and the Federal Reserve Bank of New York may 
actually make a profit on that. I see no reason to think that 
is not true. That may very well be accurate, that one piece of 
    However, the other piece, and these really are two sides of 
the same coin, and we have been critical of trying to separate 
that out and only looking at the Federal Reserve piece and 
saying, ``oh, because that is going to get paid back, it is a 
profit,'' that other part is part of the projected $30 billion 
    So one of the reasons why we are so critical is that if you 
just say, ``oh, on these transactions, where the Federal 
Government, the taxpayer, is on track to be made whole,'' for 
someone who is not as familiar with the intricacies of these 
transactions as we all are, you would get the mis-impression 
that the counterparty payments, the decision to pay 100 cents 
on the dollar, is going to leave the taxpayer whole.
    And by Treasury's own calculation, you can't separate that 
$30 billion of anticipated loss from these transactions because 
the money that AIG paid came from a loan from the Federal 
Reserve, a separate loan that was then paid down with taxpayer 
money through the TARP. So I think it is----
    Mr. Issa. I am sorry, so I think it is very difficult and I 
think it is inappropriate to separate those two out.
    Thank you, Mr. Chairman.
    Chairman Towns. I now yield 5 minutes to the gentleman from 
    Mr. Lynch. Thank you, Mr. Chairman.
    I want to thank the witnesses for your willingness to help 
the committee with its work.
    Mr. Barofsky, we have been going back and forth with 
Secretary Geithner and Secretary Paulson earlier today about 
the decision to pay the derivatives, well, credit default swaps 
that were entered into between AIG and Goldman Sachs and a 
handful of other companies. The position of Secretary Geithner 
is that he didn't have any other tools other than paying 100 
percent of the value, 100 cents on the dollar, or allowing AIG 
to go into default and bankruptcy. And at least the testimony 
of Mr. Paulson is that he was not there, and I find that 
    But in your own impression and reviewing the record here, 
was there any opportunity for Secretary Geithner, the Treasury, 
the Fed, to negotiate a haircut with Goldman Sachs instead of 
paying them at par value, and thereby saving the American 
taxpayer possibly billions of dollars?
    Mr. Barofsky. Yes, and I think that as the Federal Reserve 
and the Secretary acknowledge, the whole plan that the hope 
from the Federal Reserve was to attempt to negotiate a haircut. 
So if there was an agreement among the parties to pay, to 
accept less than par, that obviously wouldn't have violated any 
of the policy concerns that have been described. And I think 
very much these negotiations could have been conducted in a 
different way, a more forceful way.
    The comparison that you cited to Secretary Geithner earlier 
and which is discussed in our testimony is looking back to the 
Capital Purchase Program when the nine banks were summoned to 
Washington, DC, and, as mentioned in my testimony, that is a 
pretty good example of what could have been done.
    There, of course, it was the principals that were involved 
in the negotiation for both sides, whether it was Secretary, 
then-President Geithner, Secretary Paulson, Chairman Bernanke 
on behalf of the government, and the chief executive officers 
of the nine banks on the other side. That didn't happen with 
AIG. The forcefulness of those negotiations, being told that 
this was important to the American people.
    Now, I am not suggesting that threatening to pull their 
license or using regulatory authority to punish those that 
didn't participate, but emphasizing how important it was to 
policymakers of the U.S. Government. That didn't happen with 
respect to AIG. And indeed, again, these were conversations 
that were done largely over the telephone with mid-level 
    Those nine executives were summoned to D.C. for the TARP, 
and they were put around the table. And that communication, 
that this is really important and we could, you know, I can 
continue to speculate and give about 9 or 10 other things that 
could be said, all I think within the confines of the Fed's 
policy considerations.
    Now, we have been somewhat critical of some of those policy 
considerations, and you know, we disagree with some of them, as 
reflected in the audit. But I think that what is bothersome is 
that even if you accept all of those concerns, they could have 
just tried a little harder, and maybe it would have been 
unsuccessful. We don't know. But as I noted in my testimony, we 
recently spoke to the French regulator, and they said if the 
negotiations went something like that, they would at least be 
willing to engage. And we know that UBS would have been willing 
to engage.
    And we don't know what the reaction is of the other 
potential counterparties because that telephone conversation 
from then-President Geithner or then-Secretary Paulson or 
Chairman Bernanke saying, ``hey, this is important; we want to 
you to be involved,'' we know they were talking to these CEOs 
on a regular basis, but this wasn't elevated to that level, and 
we will never know what the result might have been. But it may 
have resulted in saving the taxpayers billions, if not tens of 
billions of dollars, but we just don't know the answer.
    Mr. Lynch. OK, thank you.
    Mr. Baxter, maybe you have been asked this question before, 
but in terms of the decision to make the payment at 100 cents 
on the dollar, were you part of that discussion?
    Mr. Baxter. I wasn't in the discussions with the 
counterparties, Congressman, but I was part of the supervisory 
    Mr. Lynch. How did you arrive at that? Could you tell me?
    Mr. Baxter. I can try. First of all, there was a critical 
deadline, Congressman, of November 10th, and that was the day 
that AIG was going to announce a $25 billion loss in its 10-Q 
for the third quarter, so we were looking at that. And we were 
being told by the credit rating agencies that unless something 
happened with respect to the credit default swaps on or before 
November 10th that there was a strong probability of a 
    Now, a downgrade would have been catastrophic. It would 
have brought us back to where we were in September, on the 
brink of an AIG bankruptcy. So from those of us who were 
working at the New York Fed, we looked at that as a hard 
deadline. And the execution risk of failing to get the credit 
default swaps torn up by that date was it would have put us 
back on the brink of bankruptcy.
    So that was the risk of deal failure. That was the 
execution risk, so we had to get the deal done.
    AIG had been unable, as Mr. Habayeb has testified, to get 
those credit default swaps torn up. On November 6th, 
Congressman, we got formal authorization from Stasia Kelly, who 
was then AIG's General Counsel, to take over and see whether we 
could get those credit default swaps terminated by deadline. So 
we were operating against the clock to do that.
    Our choices were should we push for concessions and try to 
use whatever leverage we had to get those concessions? Or 
should we simply go to par which would apply to every 
counterparty, and the way par works is you offset the 
collateral that these counterparties had been pulling out of 
AIG against--you offset that collateral against the par price 
of the bonds.
    So those were the weighing of the risks as we faced them. 
And on the one hand, failure to get a deal on or before the 
10th would have brought us back to the brink of an AIG 
bankruptcy. So the risk was in pushing for concessions of 
perhaps 2 percent. We risked billions of further Federal 
Government assistance.
    Now, what happened? We asked eight counterparties about 
concessions. Seven said ``no.'' Two of those seven were French, 
and they were supported by the French Government in their 
refusal. The one that said ``perhaps'' was UBS. It said perhaps 
up to 2 percent, but we need to be treated just like everybody 
    So had we continued to use whatever leverage we had, and as 
I said earlier, we didn't have much, we risked losing the deal 
by November 10th, and that would have brought us right back to 
September, to the brink of an AIG bankruptcy and to 
catastrophic systemic consequences that would have resulted.
    That balancing led us to see that the solution would be to 
go with no concessions. We brought that to President Geithner. 
He agreed, and that is what we did, but we brought it home by 
deadline. We got it done by the 10th.
    Chairman Towns. The gentleman's time has expired.
    I now yield 5 minutes to the gentleman from Indiana, Mr. 
    Mr. Souder. Did I hear, Mr. Baxter, did you say that Mr. 
Geithner signed off on paying at par as part of that decision?
    Mr. Baxter. He did.
    Mr. Souder. I didn't have that impression earlier, but 
maybe I misunderstood something.
    I am not sure who to ask this particular question to first, 
but let me ask Mr. Barofsky. One of the questions here is, my 
understanding was, to avoid the--and part of the question for 
the secrecy, was to avoid the risk of the rating agencies 
downgrading the securities and bonds. Is that true? Is that 
your impression?
    Mr. Barofsky. The Federal Reserve has cited as one of the 
justifications for paying the counterparties at par was one of 
the concerns about the effect on ratings agencies and the 
    Mr. Souder. And why hadn't they already been downgraded?
    Mr. Barofsky. Well, they actually had been downgraded up 
until that point, but----
    Mr. Souder. Do you believe they were keeping up? In other 
words, in the many hearings that you have been here and so on, 
it seems to me that to have a private economy work, one thing 
has to happen because, you know, CalFed, or whatever the big 
insurance for State employees there, is the biggest, I guess, 
investor, and he said he has only got a couple of people to 
track. If those rating agencies aren't accurate, the whole 
system collapses. And it seemed to be questionable whether they 
were moving fast enough in the economy to downgrade it. And in 
effect here, a partner in the Fed was trying to help disguise 
    Mr. Barofsky. I mean, ultimately, one of the observations 
in our audit is the outsize influence the credit rating agency 
had throughout this process. As Mr. Baxter just stated, it was 
basically the rating agencies that were holding the gun to the 
head of the Federal Reserve, giving them the perception they 
had to move so quickly. It was the rating agencies that gave 
the fear to the Federal Reserve, and I am sorry, I don't mean 
to, I am paraphrasing Mr. Baxter, but that fear that AIG would 
be put into bankruptcy, that was a legitimate fear that the 
Federal Reserve had because of the results of the rating 
    And of course, so much of the lead-up to AIG's problems 
were the result of the rating agencies. First, over-valuing the 
CDOs and the bonds that underlie the credit default swaps, and 
then throughout the process. Indeed, it was the rating agencies 
who were ultimately looked at the original deal that the Fed 
brokered with AIG and the high interest rate, and determined 
that, too, would lead to an eventual downgrade. So, yes, they 
had an outsize role in this for certain.
    Mr. Souder. Mr. Baxter, my question to you would be how can 
a free market economy work if the Fed tries to manipulate the 
rating agencies by pumping money in and trying to conceal that?
    Mr. Baxter. We never tried to manipulate the rating 
agencies, Congressman. We took their observations as they gave 
them to us, never tried to lever them in terms of what they 
were going to do with respect to AIG. Instead, what we tried to 
do was to restructure AIG to avoid a downgrade.
    Now, in the context of November 10th, and this is an 
important point with respect to the credit default swaps, had 
that downgrade occurred, many of the counterparties would have 
had a right to terminate their credit default swaps, which 
would have enabled them to keep the cash collateral posted and 
the bonds. And that is a critical piece here because the way we 
restructured these credit default swaps, the Fed took the bonds 
into our vehicle, Maiden Lane III. And remember, the bonds had 
diminished in value from par to approximately half, and the 
counterparties had gotten collateral for that diminution in 
    As those bonds, which we now have in our vehicle, as those 
bonds come back in value as our Nation emerges from the worst 
financial crisis in 70 years, we capture that value in a 
Federal Reserve vehicle. And so it is the offset, if you will, 
in broad terms, conceptual terms, to the collateral that was 
    And so this is another important feature of the 
restructuring that the Fed did which was far, far better than 
the alternative of allowing there to be a rating agency 
downgrade and those catastrophic consequences.
    Mr. Souder. And why did you want to conceal that?
    Mr. Baxter. Never wanted to conceal that, Congressman. It 
is, and we tried----
    Mr. Souder. Is it inaccurate to say that you asked for 
special conditions where markets wouldn't be able to see, for 
fear they might speculate if they saw that you were taking this 
    Mr. Baxter. Well, first with respect to the schedule A, to 
the shortfall agreement which had the counterparty names, the 
CUSIPs, the tranches. It was never the intention of AIG or the 
Fed for that schedule to be filed with a shortfall agreement. 
So there was a misunderstanding in the beginning, I think, as 
to why that wasn't attached.
    Now, the Commission came back and said, we need that 
exhibit attached, and then we made an application for 
confidential treatment because we thought that information 
would hurt the taxpayer interest in our vehicle. Now, the 
information I am talking about are the counterparty names, the 
CUSIP numbers identifying the bonds we hold, and the tranches. 
After the hearing that occurred before this committee in March, 
we and AIG changed our view on the counterparty names.
    So the only information today that is confidential with 
respect to the schedule A is the CUSIP numbers and the 
tranches, the identifying information for the cards, if you 
will, that the Fed holds in its hand in this vehicle. That is 
what we are keeping confidential now, and for the right reasons 
because we are worried when we sell out that portfolio that if 
the street knows what we are holding, it will hurt the taxpayer 
interest. That is the only reason. It is not a cover-up.
    Chairman Towns. The gentleman's time is expired.
    I now yield 5 minutes to the gentleman from Maryland, Mr. 
    Mr. Cummings. Thank you very much, Mr. Chairman.
    Inspector General Barofsky, thank you again for all the 
work you and your team have done over the last year. It has 
been simply invaluable.
    When I and 26 of my colleagues wrote to request that you 
conduct an audit of the issues before us today, our main 
concern was the decisionmaking process leading to paying AIG's 
counterparties at 100 percent par value. However, after 
Bloomberg and the New York Times published emails surrounding 
the disclosure, questions began to emerge about how the events 
surrounding the Maiden Lane III transactions were disclosed to 
the SEC.
    One of the first things I did was send you a letter asking 
whether your staff already knew about the emails that were 
released to the press and did these emails affect the 
conclusions that you reached in your audit. I was also 
interested in whether you planned to open the audit.
    You responded quickly, as you recall, saying that it was 
not your policy to comment on open investigations. Is that 
    Mr. Barofsky. Yes.
    Mr. Cummings. All right. And I want to clarify, in your 
office ``audit'' and ``investigations'' are different tasks 
conducted by different personnel in different divisions. Is 
that right?
    Mr. Barofsky. That is correct, generally speaking.
    Mr. Cummings. OK. And what are the missions of those 
    Mr. Barofsky. Sure. Audit, as you know, under EESA, we have 
the responsibility to both audit and investigate all actions 
taken under the TARP. The best way I think to think of audit, 
it is almost investigation without the presumption that there 
was a crime or a violation. It is a review, a historical review 
of what occurred, and in looking to see what went wrong, what 
went right, and explaining, bringing basic transparency and 
making recommendations.
    Our Investigations Division is a law enforcement agency. We 
are like the FBI for the TARP. It is populated generally by 
special agents who have full law enforcement authority, guns, 
badges, and the authority to make arrests. We also have 
attorney advisers and support personnel. And when we move 
something into the Investigations Division, it is because we 
are taking a look to see if there was misconduct. If there is 
some reason or there is an allegation or we suspect in certain 
cases where there is a crime or even a civil violation, we do 
support civil investigations as well, we move it over into that 
    So with respect to your letter and the request, we didn't 
receive many of the documents that this committee received, 
including those documents, as well as some other documents that 
pertain very directly to some of the issues directly addressed 
in the audit.
    Mr. Cummings. Does it surprise you that you didn't receive 
them when you would, I mean, now looking back?
    Mr. Barofsky. Some of the documents I am extremely 
surprised that we didn't receive. And that is why we are 
conducting a new investigation to determine what the 
circumstances were of why specific documents that we requested 
were not provided to us.
    Mr. Cummings. So an open investigation is not the same as 
an open audit. Is that right?
    Mr. Barofsky. That is correct, sir.
    Mr. Cummings. And I assume you cannot say whether the open 
investigation is civil or criminal. Is that correct?
    Mr. Barofsky. Well, an investigation at this stage in 
particular, we are just starting out. We are just taking a look 
and see where it goes. If it does result in our belief for a 
referral for civil or criminal prosecution, we would do that. 
We would then interact with the Department of Justice. We don't 
have prosecutorial authority.
    If we determine otherwise, especially with respect to these 
investigations, we have the option of preparing an 
investigative report which we will provide to you and this 
committee reporting on our findings.
    Mr. Cummings. Can you tell us what the timeframe is for 
this? Do you just have to take your time and figure that one 
    Mr. Barofsky. I mean, for us to do this right, 250,000 
pages of documents that this committee received, we also 
received. That is going to take us some time because we really 
can't determine what we didn't receive until we go through 
literally every page of those documents.
    And given the significance and importance of this matter, I 
usually drive my agents pretty hard and ask them to move very, 
very quickly. In this instance, I told them above all to move 
quickly, but we need to be very thorough and very accurate. And 
that will be followed, as all investigations, by a series of 
interviews once we get our hands around the documents.
    So I hesitate to put a time.
    Mr. Cummings. I understand. Bloomberg reported this morning 
that you are, ``probing whether the New York Fed improperly 
limited the release of information about payments to AIG's bank 
counterparties.'' Is this correct or can you comment on that?
    Mr. Barofsky. Yes. We also have opened a probe into some of 
the allegations that came here. And again, I really want to 
stress that when we open an investigation, we are not presuming 
misconduct or anything like that. It has been suggested that 
there was misconduct. Again, so what we are doing, it is our 
job, our responsibility, our statutory responsibility when such 
issues are raised, we have to go look at it.
    And as I said, if everything was done in a legally correct 
manner, we will report that.
    Mr. Cummings. I see my time is up.
    Thank you, Mr. Chairman.
    Chairman Towns. Thank you very much.
    I now yield 5 minutes to Congressman Bachus.
    Mr. Bachus. Thank you.
    Mr. Barofsky, I am going to ask you this question. You 
know, Secretary Geithner says that they didn't disclose some 
things, but now they have come, they have fully disclosed 
everything and they are trying to inform the American people.
    However, I think his testimony today appears to mislead the 
American people, and let me ask you about that.
    On page 10 of his testimony, he is talking about the AIG 
bailout. We paid the fair market value at the time for the 
assets. Essentially, what the Federal Reserve did was to 
purchase these securities from the counterparties with a par 
value of $62 billion for a purchase price of $27 billion. That 
is not true, is it?
    Mr. Barofsky. It is partially true.
    Mr. Bachus. Partially true. What they don't say is they got 
$27 billion of taxpayer funding and they got to keep $35 
billion worth of collateral.
    Mr. Barofsky. I mean, it is true in addition to the $27 
billion that came from Maiden Lane III, all that other AIG 
collateral that they previously had been paid, which was made 
possible largely by the other loan from the Federal Reserve, 
which was back-filled $40 billion by taxpayer money. And I 
think in the Secretary's full testimony, he does acknowledge 
that there is an AIG loss. What we cite in our testimony was a 
statement that was put out by Treasury which was completely 
unbalanced and gave the impression that the taxpayers would be 
made whole because of that narrow issue of Maiden Lane.
    Mr. Bachus. Well, that is actually what this statement this 
morning to me says that they purchased securities with a par 
value of $62 billion for a purchase price of $27 billion.
    Mr. Barofsky. It is literally true in the Maiden Lane III 
facility. That is what occurred. It is literally true.
    Mr. Bachus. Yes. He said in the end, the prices paid for 
the securities were their fair market value. That is not true 
either, is it?
    Mr. Barofsky. Well, again, with respect to the Maiden Lane 
III part of it, it is literally true, but to look at these 
transactions as a whole, the counterparties did receive 100 
cents on the dollar for those securities and for tearing up the 
credit default swap contracts. So the total compensation when 
you include the collateral they were able to keep was 
effectively par value.
    Mr. Bachus. Because the counterparties, they received $62 
billion in all, $27 billion of it paid directly from the 
special purpose vehicle.
    Mr. Baxter, Mr. Friedman, you would agree with that? They 
received $27 billion from the special purpose vehicle, is that 
    Mr. Baxter. I think it is very important, Congressman 
Bachus, to understand that we paid for multi-sector CDOs with a 
par value of $62 billion.
    Mr. Bachus. Right.
    Mr. Baxter. Our vehicle paid $29 billion.
    Mr. Bachus. $29 billion, all right.
    Mr. Baxter. Now, $27 billion went to the counterparties; $2 
billion went to AIG. Another important aspect of this is then 
we received those multi-sector CDOs into our vehicle.
    With respect to the cash collateral that AIG posted, this 
is important. This is important.
    Mr. Bachus. But what I am saying, to say that----
    Mr. Baxter. We now can recapture that because as those 
multi-sector CDOs come back in value as our Nation emerges from 
the worst financial crisis in 70 years----
    Mr. Bachus. I understand about the worth, but what I am 
    Mr. Baxter. Then the value comes back.
    Mr. Bachus. But what I am saying, it was $27 billion and 
then it was $35 billion worth of collateral that the 
counterparties were allowed to keep.
    Mr. Baxter. Which they were legally entitled to.
    Mr. Bachus. Oh, I understand that, but what I am saying to 
say that this, you know, that for $27 billion you get $62 
billion worth of asset is certainly not the whole truth, is it?
    Mr. Baxter. The whole truth, Congressman, is you have----
    Mr. Bachus. No, I am asking you.
    Mr. Baxter. I am trying to answer your question. You have 
insurance policies in the form of a CDS. You have assets that 
are insured. We got the assets. What happened with AIG is they 
got to tear up the insurance policy that was threatening its 
    Mr. Bachus. Right. I understand all that. I mean, I have 
heard that repeatedly.
    Mr. Baxter. That is the whole truth.
    Mr. Bachus. But he also says that the fair market value, 
that you paid the fair market value. But some of these CDOs, 
some of them they were rated CCC or lower, and the market 
prices at the time, a lot of them were 20 cents and below that. 
Is that not correct?
    Mr. Baxter. Well, Congressman, I am a lawyer. I won't 
comment on the value of any particular asset because it is 
beyond my competence. In our view and the view of our experts--
    Mr. Bachus. Well, BlackRock, who the Fed hired, they said 
that they valued the paper at the average of less than 50 cents 
on the dollar. That would have been somewhat less than $31 
    Mr. Baxter. In November 2008 at one of the worst points in 
our financial crisis, the loan we made from the Fed to Maiden 
Lane III, the vehicle that is holding the assets, is a 6-year 
loan and we have a right of renewal. So we can hold these 
    Mr. Bachus. Oh, I understand all that, but I am saying at 
the time you paid par for something that was trading--BlackRock 
says they were trading 50 cents on the dollar.
    Mr. Baxter. We paid fair value.
    Mr. Bachus. All right.
    Chairman Towns. The gentleman's time is expired.
    I yield 5 minutes to the gentlewoman from New York, 
Congresswoman Maloney.
    Mrs. Maloney. Thank you, thank you very much for yielding, 
Mr. Chairman, and ranking member for holding this hearing.
    Along with many of my colleagues, we pushed very hard to 
have full disclosure and I would like to put in the record 
letters that I wrote to the Fed requesting full disclosure, 
along with letters from many of my constituents.
    Chairman Towns. Without objection, so ordered.
    [The information referred to follows:]

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    Mrs. Maloney. OK. I would like to get back to Mr. Bachus' 
questioning, Mr. Baxter, where you bought the $62 billion for 
$29 billion. My question is, what is the value now?
    Mr. Baxter. The value now, I can't say, Congressman.
    Mrs. Maloney. Well, did the taxpayers win or lose?
    Mr. Baxter. Right as of today, we have a situation where 
our loan balance is $4 billion less than the amount of the 
portfolio, which I will estimate and I think I need to 
estimate, our loan balance is around $17 billion and the 
portfolio is around $21 billion or $22 billion.
    Mrs. Maloney. Well, let's get back to the line of 
questioning from Mr. Cummings. I know, and we all know that we 
released the names of the counterparties, but I understand that 
you still want to withhold other information concerning these 
assets. And what is that information? And why do you want to 
continue to keep it a secret?
    We believe, in Congress, many of us, that sunshine is the 
best disinfectant, and anti-corruption and fraud deterrent. So 
why do you feel this should be kept secret? What is it and why 
do you feel we want to keep it secret?
    Mr. Baxter. The information that we are still concerned 
about at the Fed on the schedule A to the shortfall agreement 
is information about the CUSIP numbers and tranches of the 
multi-sector CDOs that the Fed now has in Maiden Lane III, its 
vehicle. Our experts, BlackRock, tell us that if we publish 
that information, when the day comes, and it may be 4 years, it 
may be 6 years, it may be longer, when the Fed wants to sell 
those assets, that we will be hurt. We will be hurt because 
traders in the market will know what we are holding. Like in a 
card game, if one player shows his hand to everyone else, that 
one player is prejudiced.
    So that is the worry. The worry is it will injure the 
taxpayer interest if we show our hand, if we show our CUSIP 
numbers and our tranches. So that is the key. And we applied 
    Mrs. Maloney. Well, Mr. Baxter, reclaiming my time, isn't 
it standard policy for investors to disclose holdings like 
these in securities filings?
    Mr. Baxter. Well, these particular multi-sector CDOs, it is 
not customary, I am told, for investors to put this information 
out. And if you do, again I am relying on what experts at 
BlackRock have told us, if you do, you can be gamed by hedge 
funds and sophisticated players when the time comes when you 
want to sell.
    Mrs. Maloney. So you are saying that the public, the 
taxpayer would be at greater risk in the ability to reclaim 
these funds if this information was disclosed. Is that true?
    Mr. Baxter. That is true, Congresswoman. I would also 
wonder why the average American would need to know the precise 
CUSIP numbers and tranches of the Maiden Lane portfolio. It is 
the kind of information that, at least in my household, my 
family wouldn't know how to interpret. But sophisticated 
players, hedge funds, traders on the street, they could game us 
if that information was out there.
    Mrs. Maloney. Going forward, the Financial Services 
Committee has passed a regulatory reform bill that includes in 
it resolution authority which would be a wind-down authority so 
hopefully we would not be in this type of crisis again.
    And I would like to ask Mr. Friedman from, you say you 
weren't privy to this information, but your experience in 
finance, do you think things would have been different if there 
was a more formal process for AIG such as this resolution 
authority? And could you tell us the difference between 
government or taxpayers bailing out AIG and Lehman, which is a 
question many of my constituents are perplexed over. What was 
the difference between the two in response?
    Mr. Friedman. Yes, thank you, Congresswoman.
    As I mentioned when you and many of your colleagues were 
voting, the Board of the Federal Reserve Bank of New York has 
ring-fenced away from these supervisory regulatory or, and 
certainly these extraordinary issues. So I have no direct 
knowledge from that standpoint of this.
    So what I am giving you is my opinion just as a person 
who's been around markets for many years. I do believe that for 
our financial system to work effectively, we have to get away 
from too big to fail, too intertwined to fail. I think these 
are dangerous things, and I earnestly hope that as Congress 
works its way through restructuring our financial regulatory 
system, they will have some form of resolution authority to 
give the people who are on the firing line the next time a 
crunch comes, and one will come at some point in the future, 
the ability to effect some sort of a conservatorship or 
resolution to wind down these entities.
    I think that people who are making money in markets should 
be at risk of losing money. But if there is not the ability to 
do this without jeopardizing the entire financial system of the 
country, very much including Main Street, I think people get 
their hands tied behind their backs. So I earnestly hope we 
will have some kind of a resolution authority.
    As far as the difference between Lehman Brothers and AIG, I 
have no direct inside knowledge of this. I can say that AIG was 
a, to an outside observer, much bigger, more complex and even 
more dangerous to the economy type of a situation, and there 
may well have been, and this Mr. Baxter would be much better 
able to answer than I, there may have been very much a 
difference in terms of the Fed's ability to enter into it based 
on the quality of the collateral they could get, but that I 
can't speak to personally myself.
    Chairman Towns. The gentlewoman's time has expired.
    Mrs. Maloney. Thank you, Mr. Chairman.
    Chairman Towns. I yield now 5 minutes to the gentleman from 
Illinois, Congressman Davis.
    Mr. Davis. Thank you very much, Mr. Chairman, and I thank 
each of you for being here.
    Mr. Friedman, let me ask you, what was the role of the 
Board of Directors of the Federal Reserve Bank of New York in 
the decision to compensate AIG counterparties at par?
    Mr. Friedman. Yes, sir, my strong understanding and 
recollection of our role is that we were in effect an advisory 
board on most issues, with administrative responsibilities for 
things like controls, audit committee, etc. And so we were 
walled away, ring-fenced away from regulatory issues, 
supervisory issues, or the extraordinary types of emergency 
interventions that took place during 2008.
    If you think of the makeup of the Board, during my tenure 
something like six of the nine members either had some 
affiliation with banks or with financial institutions, so there 
would have been myriad conflicts if we had been involved.
    In my experience, the staff of the bank was very meticulous 
in keeping us involved in these transactions, so I can say that 
I played no role in any of these decisions or in ratifying 
them. I have been advised very recently that on the night that 
the AIG transaction was finalized, I and the chairman of our 
Audit Committee received a courtesy summary briefing from Fed 
officials telling us what had happened and that this would be 
announced the next morning.
    So I hope that is responsive.
    Mr. Davis. Well, let me ask, during the time period in 
October and November 2008, when the Federal Reserve Board of 
New York's staff were deciding how to address the problems, how 
to deal with them, did you get any briefings from the staff on 
the actions that they were taking and the policy options that 
they were considering?
    Mr. Friedman. I recollect no such briefings during the 
period that they were trying to determine what to do. I have no 
recollection of ever being asked for my views or proffering my 
views. I have a recollection of, after the September 
intervention when AIG was carried out, that evening being 
getting a courtesy summary posting from Mr. Geithner telling us 
what they had done, which would be in the newspapers the next 
day. And all of this was consistent with a design, as I 
understand it, of the statute that a prior Congress passed for 
how the Federal Reserve Banks should operate.
    Mr. Davis. You are on the Goldman Sachs Board of Directors?
    Mr. Friedman. Yes, sir.
    Mr. Davis. And you were on the Goldman Sachs Board of 
Directors in late 2008?
    Mr. Friedman. Yes, sir.
    Mr. Davis. As the chairman of the Federal Reserve Board of 
New York, the Bank Board of New York Board of Directors, do you 
think your access to information and the decisionmaking process 
at the Fed gave Goldman Sachs an advantage in weathering the 
storm when there were so many other firms floundering and 
    Mr. Friedman. Sir, absolutely none, because the staff of 
the Federal Reserve Bank of New York, in my experience, was 
very careful and meticulous to keep us away from any 
information that would be of the type of nature you talk about. 
The potential for conflicts was rife there.
    You know, the purpose of that Board, the primary purpose, 
as I saw it, was it gave the president of the bank a group of 
knowledgeable market people that he could get information from 
as to what was happening in their areas, their business areas, 
and their communities. And I would speculate that if you had a 
Federal Reserve Bank in an area in the Southwest, you would 
want oil expertise. In an agricultural area, you would want 
people with farm expertise.
    We had a lot of financial market expertise, but the 
discussions were at the level of what are you seeing in the 
markets, what are you seeing in the economy. They wouldn't ever 
tell you what was happening in another bank, which was probably 
a competitor of one you were affiliated with. And I just think 
it was handled in a very professional and meticulous fashion.
    Mr. Davis. So the firewalls were there that would prevent 
any conflict of interest?
    Mr. Friedman. In my experience, they were very carefully 
supervised, sir, and I never had a sense that anyone had any 
desire to transgress.
    Mr. Davis. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Towns. The gentleman's time is expired.
    I now yield myself 5 minutes, but I will yield a minute to 
the gentleman from Massachusetts before I raise my questions.
    Mr. Lynch. Thank you, Mr. Chairman.
    Mr. Friedman, just following up on Mr. Davis' question. I 
am concerned about the overall influence of Goldman Sachs in 
Treasury and at the Fed. And I think your own situation is 
somewhat instructive. As I understand, you were previously on 
the Goldman Sachs Board of Directors.
    Mr. Friedman. I was. During the period you have been 
discussing I was and I am still on this.
    Mr. Lynch. Right. OK. And then you became a member of the 
New York Fed Board of Governors?
    Mr. Friedman. Yes, sir.
    Mr. Lynch. OK. And while you were there, apparently you 
owned a significant amount of shares in Goldman Sachs, but that 
was OK at the time because they were not a bank holding 
company. Right?
    Mr. Friedman. Yes, sir.
    Mr. Lynch. And then when they became a bank holding 
company, you had a decision to make, and that was to either 
divest, right? Or get a waiver?
    Mr. Friedman. Yes.
    Mr. Lynch. And you applied for the waiver.
    Mr. Friedman. Well, the Fed staff applied for the waiver. I 
did not apply for the waiver.
    Mr. Lynch. OK. And then while the waiver was pending, you 
bought 37,000 more shares of Goldman Sachs.
    Mr. Friedman. Yes.
    Mr. Lynch. What was the thinking behind that?
    Mr. Friedman. Let me tell you what the--when I went on the 
Fed Board, the Fed Reserve Board, I was a director of Goldman 
Sachs. I had Goldman Sachs shares and I would be regularly 
receiving Goldman Sachs shares as part of your directorship 
    Mr. Lynch. I get that part, but if you are not in 
compliance and you are asking for a wavier, what about the 
decision to buy 37,000 more shares of Goldman Sachs?
    Mr. Friedman. OK. At the time Goldman Sachs became a bank 
holding company, I then became technically ineligible to be a 
Class E Director. So there were a number of options.
    I was not going to at that point, it would not have been 
feasible for me to resign from the Goldman Sachs Board and sell 
all my shares. I had done that several years before when I went 
to take an administrative post in a prior administration. So 
that left two options. One was for the Fed to basically say 
your status has changed; you need to resign, in which case I 
would have promptly saluted smartly and resigned that 
    Mr. Lynch. Excuse me, sir. I am sorry, but your answer is, 
for the last 3 minutes, has been unresponsive. So you knew you 
were not in compliance. You had to apply for a waiver to stay 
in that position, yet you bought 37,000 more shares. Can you 
please, and I don't mean to badger you, but could you answer 
that part of the question?
    Mr. Friedman. I will. My understanding of the practices and 
precedents of the Federal Reserve was that during the pendency 
of a waiver, you continued on in your role as a director and 
the rules were in abeyance. And that was actually the practice 
of what happened. I continued chairing the Board. Ultimately 
during this period, when Mr. Geithner was tapped to go to 
    Mr. Lynch. I still don't understand.
    Mr. Friedman. And I during this period, I made a decision 
in December to buy some Goldman Sachs shares. This did not 
change the eligibility at all because----
    Mr. Lynch. You just owned more. Here is the problem, as a 
member of the Board of Governors, you are making decisions on 
matters that directly affect Goldman Sachs. And you are a 
former shareholder, current shareholder, and then you buy 
37,000 more shares of that company that you are overseeing.
    Mr. Friedman. Yes.
    Mr. Lynch. Therein lies the problem. Let me ask you, I 
notice in dealing with Treasury and the Fed that there are a 
lot of Goldman Sachs employees all over the place here. Is 
there any type of program where Goldman encourages their 
employees to sort of salt the regulators' offices that they are 
regulated by?
    Mr. Friedman. Certainly none whatsoever in the sense of, 
gee, this is some kind of a firm strategy. That I can tell you.
    Mr. Lynch. Yes.
    Mr. Friedman. What there has been over the years is a 
certain tradition that you work here, you try to do well for 
yourself and your family, and then you give back and you do 
public service. For many years, this was regarded as a very 
constructive and positive thing.
    Mr. Lynch. I can see that.
    Mr. Friedman. Lately, it has gone the other way and people 
are thinking is there some ulterior motive.
    Chairman Towns. Reclaiming my time, reclaiming my time. It 
was, you know, initially it was a minute, you know.
    Mr. Lynch. Thank you. You have been very generous, Mr. 
    Mr. Issa. I would ask unanimous consent that the chairman 
have an additional minute added.
    Chairman Towns. Thank you very much. I appreciate that.
    Let me just say that we are going to close out. But just 
before we close, Mr. Friedman, let me just ask you. You still 
sit on the Board of Goldman Sachs. Right?
    Mr. Friedman. Yes, sir.
    Chairman Towns. The CEO of Goldman Sachs has said that he 
didn't need the billions he received in counterparty payment 
from AIG. He said he didn't really need it. If that is the 
case, why doesn't Goldman Sachs give back the money? Mr. 
Friedman, my advice to Goldman Sachs is just come clean and say 
you need the money and you appreciate the fact that the 
American taxpayers were so generous. Why not?
    Mr. Friedman. You were talking, sir, about a financial 
transaction where the Goldman Sachs people were in a commercial 
transaction with AIG.
    Chairman Towns. That is correct.
    Mr. Friedman. And they had entered into at a time when AIG 
was a AAA company and they were doing it, acting as 
intermediaries for Goldman Sachs clients. They had worked very 
carefully on their risk management to protect themselves 
against a deterioration in the value of these CDOs or in the 
deterioration of the value of AIG, and they felt that they were 
fully hedged and had protected their shareholders' interest.
    I do not think that there is any feeling there that they 
did anything other than what a market participant would do in 
the normal course.
    Chairman Towns. You are saying they did not need it. Is 
that what you are saying?
    Mr. Friedman. Well, what I would say was this. Goldman 
Sachs has consistently said--there was something like $20 
billion, round numbers for illustrative purposes, of 
instruments that they sought insurance on. There was a 
deterioration in the value of that. Let's say, illustratively, 
roughly half. They felt that AIG, from whom they had purchased 
this credit insurance, owed them $10 billion. They had $7.5 
billion of collateral. That left a shortfall of $2.5 billion. 
They had purchased insurance on AIG's survival from other major 
institutions and had collateral and netting arrangements with 
these other institutions.
    So what they have consistently said is that their direct 
exposure, and they have used that word, direct exposure, to AIG 
was not material.
    Now, I am not going to say that, and this may be the point 
that the SIGTARP made, but I am not going to say that in the 
event of a financial Armageddon, all bets weren't off, but they 
are the stewards for the money of their shareholders.
    Chairman Towns. All right.
    Mr. Friedman. And that is the----
    Chairman Towns. Thank you very much.
    Mr. Issa. Mr. Chairman, just a couple of quick UCs? I would 
ask unanimous consent that all Members have 5 legislative days 
in which to submit both their opening statements, and any 
followup questions to any of our witnesses.
    Chairman Towns. Without objection, so ordered.
    Mr. Issa. I ask unanimous consent that the letters earlier 
submitted, that if the Chair would eliminate his reserve at 
this time. These are letters that you were copied to a long 
time ago, hopefully.
    Chairman Towns. Right. Definitely. Still reserving the 
right to object because some of them I am not sure I have seen, 
so I want to make certain that we see them. I don't really see 
a problem, but just in case there is a problem, I want to 
reserve the right.
    Mr. Issa. OK. Well, actually, I will withdraw my UC on that 
and simply submit them as new questions for the record. Perhaps 
that would be easier.
    Chairman Towns. Without objection.
    Mr. Issa. And then last, the UC on, or second last, the UC 
on the schedule A. Are you prepared to withdraw your 
reservation on that at this time?
    Chairman Towns. I am prepared to withdraw.
    Mr. Issa. Thank you, Mr. Chairman.
    And last, earlier you had said that you would compel 
witnesses to answer. It is the custom of the committee that it 
be 7 days. Could I have unanimous consent that 7 days after 
their receipt, they be expected to respond to our questions?
    Chairman Towns. Without objection.
    Mr. Issa. Thank you, Mr. Chairman, and thank you for 
holding this incredibly successful hearing. I think this is 
probably our finest bipartisan hour. I think the witnesses, 
whether they liked the questions or not, would certainly agree 
it was bipartisan.
    I yield back.
    Chairman Towns. Thank you very much.
    Let me thank all of our witnesses for being here today, and 
of course we really appreciate the fact that you have taken the 
time to come.
    And without objection, I enter this binder into the 
committee record.
    But before we adjourn, let me state that if the AIG bailout 
and the Government's involvement in it teaches us anything, it 
shows that deals with the taxpayers' dollars that are made in 
secret results in distrust and deep, deep, deep disappointment. 
When taxpayers' dollars are involved, transparency must be 
first and the last focus of the government.
    Again, let me thank you very, very much for your testimony.
    Mr. Bachus. Mr. Chairman.
    Chairman Towns. I yield to the gentleman from Alabama.
    Mr. Bachus. Could I, with your leave, just mention one 
email in particular that I think highlights what you just said?
    Chairman Towns. Let me just say to you, put it in writing. 
He will answer it, and we will move forward.
    Thank you very much.
    [Whereupon, at 3:22 p.m. the committee was adjourned.]
    [The prepared statement of Hon. Gerald E. Connolly and 
additional information submitted for the hearing record