Paulson to defend AIG bailout moves

Former U.S. Treasury Secretary Henry M. Paulson Jr. will staunchly defend the decision to rescue troubled insurer American International Group in 2008 and tell a congressional panel that he and others involved acted properly.

In testimony prepared for a hearing Wednesday of the House Oversight and Government Reform Committee and obtained by Reuters news agency, Mr. Paulson says that he, Treasury Secretary Timothy F. Geithner (who then was president of the Federal Reserve Bank of New York), and Federal Reserve Chairman Ben S. Bernanke acted properly because the situation was dire.

“If AIG collapsed, it would have buckled our financial system and wrought economic havoc on the lives of millions of our citizens,” said Mr. Paulson, who headed Treasury from 2006 to 2009 in the administration of President George W. Bush.

The hearing is to examine how AIG handled payments to banks that were counterparties for credit default swaps that AIG had issued and to examine why it paid 100 cents on the dollar to settle them, rather than getting a discount.

Rep. Edolphus Towns, New York Democrat and panel chairman, said Tuesday that in addition to Mr. Paulson, Mr. Geithner and other former Federal Reserve Bank of New York officials, the witness list will include Neil Barofsky, special inspector general for the Troubled Asset Relief Program.

Also Tuesday, Rep. Darrell Issa of California, the committee’s top Republican, called on Mr. Towns to subpoena the Fed for documents related to the role of Mr. Bernanke. He says the committee has requested documents that reveal “troubling information about … Bernanke’s personal involvement in the original decision to bail out AIG.”

The documents show Mr. Bernanke rejecting staff objections to the AIG bailout, committee staffers with knowledge of the communication told the Associated Press, speaking on the condition of anonymity because they were not authorized to discuss information obtained from the whistleblower.

The news comes as the Fed faces increased public pressure. Mr. Bernanke is likely to face a Senate vote this week on his reappointment to a second term, and the Senate Banking, Housing and Urban Affairs Committee is debating new limits on the Fed’s power to supervise banks.

The committee is pressing for details about deals that sent billions from AIG’s bailout to big banks, including Goldman Sachs Group, Mr. Paulson’s former firm. Lawmakers want to know why the New York Fed pressed AIG to be more secretive about the “backdoor bailouts” and other aspects of AIG’s management.

Mr. Geithner approved the deals, which may have cost taxpayers billions more than needed because he did not demand concessions from banks with which AIG did business, according to Mr. Barofsky’s earlier audit.

Mr. Barofsky will say he is investigating whether the Fed withheld documents he should have received as part of his earlier audit. Separately, he is looking into e-mails in which New York Fed lawyers press AIG to remove details from disclosures with the Securities and Exchange Commission.

• From combined dispatches