NU Online News Service, May 20, 4:00 p.m. EDT
WASHINGTON–Treasury Secretary Timothy Geithner cautioned today that the government's involvement with American International Group is likely to be lengthy.
Mr. Geithner also ruled out forcing AIG's counterparty credit holders to take a loss on their trades with AIG through its troubled Financial Products subsidiary.
He said it would be "incredibly difficult for us to negotiate effectively to reduce the value of those claims."
Mr. Geithner's comments were made at a Senate Banking Committee hearing update on the progress of the Troubled Asset Relief Program in response to tough questions from Sen. Richard Shelby, R-Ala., the panel's ranking minority member.
Sen. Shelby called AIG a "black hole," adding that the government "keeps pumping billions of dollars into it" and it "still seems to be hemorrhaging money."
He added that some people are telling him that AIG's viable assets "were worth more six months ago than they are now."
"Mr. Geithner, you have got the bear in the house–what are you going to do about it?" he asked the Treasury secretary.
Mr. Geithner said that all involved "have no option now to selectively diminish the value of those claims without taking risk that you would have default and its consequences for AIG," Mr. Geithner said.
"The financial system still cannot withstand the failure of AIG," he said.
He said the current task of all involved–the government, AIG's board and management–is to disentangle the risky parts of the business that got the company in trouble from the viable insurance units.
Mr. Geithner said the task of winding down the risky trades in the AIGFP unit is about half-done. He said the former $2.7 trillion notional value of the risky trades has been cut in half to about $1.5 trillion. Similar comments were made last week in congressional testimony by AIG Chief Executive Edward Liddy.
Mr. Liddy said then that AIG hopes to complete the majority of the task by year-end.
Mr. Geithner said today, "There's no doubt that this company–not just to the Fed and the Treasury, but to it's board and management–proved much more complicated, much more risky than people thought, and has proved much harder to disentangle and separate."
AIG's board and management, he said, "were the ones that brought the company to the abyss."
"You can't feel more strongly than me about the need to get the government out of this company, get the company to the point where it poses less risk to the system and those underlying insurance businesses are on a path where they can be viable going forward," said Mr. Geithner.
In responding to Mr. Geithner's testimony, Sen. Chris Dodd, D-Conn., chairman of the committee, said Senate Banking Committee Chairman Christopher Dodd said, "There should be a better answer to this."
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