AIG bailout probe widens to include Paulson

A House of Representatives committee is broadening its investigation of secretive bank bailouts to include former Treasury Secretary Henry Paulson and former Federal Reserve Bank of New York Chairman Stephen Friedman.

The Committee on Oversight and Government Reform has invited Paulson and Friedman to testify about their roles in the bailout of American International Group Inc., according to the committee's chairman, Democratic Rep. Edolphus Towns.

Lawmakers want to know more about deals that funneled billions from AIG to banks including Goldman Sachs Group Inc. Friedman is a Goldman director who resigned from the New York Fed after suggestions he might have conflicts of interest.

California Rep. Darrell Issa, the committee's top Republican, also said he wants Federal Reserve Chairman Ben Bernanke to answer questions about the bailout, which he helped lead.

A Towns spokeswoman said he is "making decisions daily about witnesses and testimony." A Fed spokesman would not comment.

An earlier watchdog report said the bailouts might have cost taxpayers billions more than necessary because officials did not demand concessions from the banks. The money went to satisfy massive financial obligations that AIG was unable to meet without a government rescue.

The bailouts were managed by the Federal Reserve Bank of New York under the leadership of Treasury Secretary Timothy Geithner. Geithner has defended the deals and will testify on Jan. 27.

Issa asked earlier Friday for Paulson to testify. He asked for the hearing last week after uncovering e-mails in which New York Fed lawyers told AIG to keep some details secret.

Issa also wanted the committee to demand documents from the Treasury Department and Federal Reserve by issuing subpoenas. He said lawmakers should question Bernanke.

In inviting Paulson, Towns dealt with accusations by Democrats that the hearing was motivated by partisan attacks on Geithner.

House Financial Services Chairman Barney Frank, a Democrat, said Thursday that Bush appointees Paulson and Bernanke "outranked" Geithner. Frank said his committee also "will be looking at" the AIG deals.

Issa insisted the investigation "is not and has never been about Tim Geithner." Its goal "is to learn the truth about the apparent waste of billions of taxpayer dollars and the government's efforts to conceal this waste from the American people," he said in a statement Friday.

Towns said Friday the hearing also will include testimony from Neil Barofsky, the bailout watchdog who prepared a report criticizing the deals; New York Fed general counsel Thomas Baxter; and Elias Habayeb, the chief financial officer of the division that brought down AIG.

Treasury and the Federal Reserve refused to say which banks benefited from the "backdoor bailouts" or how much money they got until after it was disclosed in news reports. Banks including Goldman, Morgan Stanley, Deutsche Bank and Societe Generale benefited from the deals.

AIG had been negotiating the values of banks' contracts before the government took it over in September 2008, according to published reports. Geithner considered reducing the payments for two days before paying the banks off in full.

The oversight committee is investigating why the banks were paid in full and why officials including Geithner refused to name them.

The probe will give a fuller picture of the largest bailout of the financial crisis. The government's rescue of AIG, which eventually totaled $180 billion, sparked public outrage and contributed to demands for financial reform. The government also received a nearly 80 percent stake in AIG in return for the support.

Representatives for Paulson and Friedman would not comment. A Treasury spokesman did not respond to requests for comment.