AIG failure would have meant &#39;complete collapse&#39; of financial system, Paulson says

Former Treasury Secretary Henry M. Paulson, who will testify before Congress on Wednesday about the federal bailout of insurance giant American International Group, is sticking with the party line: Allowing AIG to sink would have unleashed economic Armageddon, he says.

?Had AIG failed 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,? Paulson says in remarks prepared for the House Oversight and Government Reform Committee.

The panel is probing the details of the $182-billion bailout engineered by the Federal Reserve in September and October 2008. Specifically, the committee is probing whether major AIG creditors including Goldman Sachs Group -- which Paulson chaired from 1998 to 2006 -- in effect got ?back-door bailouts? because the Fed allowed AIG to pay them in full.

As for AIG?s payments to Goldman and other creditors, Paulson pleads ignorance.

?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,? he says in the remarks, a copy of which was obtained by The Times. ?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.?

Current Treasuury Secretary Timothy F. Geithner, who was head of the New York Fed at the time of the AIG bailout, also will be testifying on Wednesday.

Paulson breaks no new ground in his basic defense of the AIG bailout. He says the company was too big to fail, but that regulators didn?t realize how big it was until the company began to unravel amid the deepening credit crisis of September 2008. He also notes that the government had no mechanism for winding down a huge insurance firm, unlike the rules in place to deal with failed banks.

The bailout ?was directly shaped by these realities,? Paulson says. ?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 that we did.?

-- Tom Petruno

Photo: Henry M. Paulson. Credit: Carol T. Powers / Bloomberg News