AIG grilling begins today

Former Treasury Secretary Henry Paulson will today say the US government rescue of AIG was necessary to protect the US economy, Dow Jones reports.

Paulson will testify after his successor, Treasury Secretary Timothy Geithner. He said he had no personal role in the decision to make payments to AIG's major trading partners on billions in insurance contracts. But the payments needed to be made to prevent a broader systemic problem.

If AIG had failed, Paulson said, "I believe we would have seen a complete collapse of our financial system and unemployment easily could have risen to the 25% level reached in the Great Depression."

No role for Geithner

Reuters reports that Geithner has denied any role in disclosures about AIG’s payments to banks. He has defended his decisions as New York Federal Reserve chief to pay full price to retire AIG credit default swaps.

"I had no role in making decisions regarding what to disclose about the specific financial terms of Maiden Lane II and Maiden Lane III and payments to AIG counterparties," Geithner said, referring to NY Fed investment vehicles that bought securities from the banks.

"We acted because the consequences of AIG filing at that time, in those circumstances, would have been catastrophic for our economy and for American families and businesses," Geithner said.

Fed supported not forced secrecy

The NY Fed's General Counsel Thomas Baxter said that the Fed "actively supported" AIG's regulatory requests to keep its bank counterparties confidential but did not pressure the bailed-out firm for secrecy.

"Some have suggested that in November 2008, AIG had planned to disclose the identities of the CDS counterparties and that the New York Fed pressured or compelled AIG not to," Baxter said in his prepared remarks for the hearing. "This is not true."

"To be sure, the New York Fed actively supported the idea of keeping this information confidential, but once again, only to maximize the value of the Maiden Lane III portfolio for the benefit of the taxpayer," Baxter.

French would have conceded

Neil Barofsky, the special inspector general for the U.S. bailout program, said in his prepared remarks to the panel that the French bank regulator had indicated that it was open to further talks on concessions.

AIG will pay back money

Bloomberg quoted Geithner as saying: “We believe that, depending on market conditions and the future performance of AIG’s businesses, the actual recovery on the Treasury’s investment could be significantly higher.

“Moreover, we are confident that the FRBNY Credit Facility, its loans to Maiden Lane II and Maiden Lane III, and its preferred interests in certain of AIG’s subsidiaries will be fully repaid.

“AIG’s insurance subsidiaries are open for business and generating positive returns,” Geithner said. “A number of those subsidiaries are attracting attention from external investors. We anticipate that AIG will generate substantial proceeds from the sale of some of those entities.”