Treasury Secretary Timothy Geithner was summoned to testify before the House Committee on Oversight and Government Reform yesterday in order to answer two questions: why did he sign off on AIG paying the big banks full value on insurance for bad assets like mortgage-backed securities–using $62 billion in taxpayer money–at a moment when everyone else was taking losses? And what was his role in the decision not to disclose to the public–which owned 80 percent of AIG at the time–the names of the banks and the payments they received, as AIG was prepared to do before the Federal Reserve Bank of New York (FRBNY) run by Geithner advised them not to?

Geithner’s answer boiled down to this: the decision in early November 2008 to pay Goldman Sachs, Bank of America, Merril Lynch, Citigroup, Societe Generale, Deutsche Bank and others 100 cents on the dollar was part of a broader effort to save AIG and it prevented an economic catastrophe; and on November 24, 2008, when he was nominated to serve as treasury secretary, he recused himself “from involvement in monetary policy decision, policies involving individual institutions, and day-to-day management of FRBNY.” (Was there anything left for him to do around the joint? And why was he still getting a paycheck?) Geithner said he therefore had nothing to do with the nondisclosure decision in December 2008.

But Geithner didn’t recuse these AIG matters up from his office, he recused them down to the vice president of the NY Fed. Apparently, decision-making over tens of billions of dollars of taxpayer money wasn’t deemed a top-level priority by him or his predecessor, former Treasury Secretary Henry Paulson, who also testified. In fact, Congresswoman Marcy Kaptur discovered through her questions that no formal recusal agreement outlining Geithner’s new responsibilities (or lack thereof) was ever executed.

Geithner argued that the New York Fed was operating under a gun. In November 2008, credit rating agencies–the same ones that gave mortgage-backed securities their highest AAA rating–were about to screw us again by downgrading AIG’s credit rating when taxpayers had already handed the company an $85 billion bailout in September. A downgrade would require AIG to pay out tens of billions of dollars more in collateral payments to the banks on the credit default swaps (insurance on the bad assets)–money that it didn’t have and that Geithner maintained would force the company to collapse. Geithner said AIG’s failure would cause an “utter collapse”–a run on banks, thousands of factories closed, millions of more Americans losing jobs, savings and home values even more devastated. Paulson said unemployment would have been over 25 percent.

AIG had already begun asking the banks for concessions, or “haircuts,” on these contracts. Only USB agreed to consider a 2 percent reduction in payments–and only under the condition that the other financial firms agreed to it as well. According to Geithner, the New York Fed decided there wasn’t sufficient time to negotiate. AIG was about to report an earnings loss of $25 billion on November 10, which would have resulted in a credit downgrade. Geithner argued that even the haircuts themselves could have led to a downgrade and consequent collapse.

But Democratic Congressman Stephen Lynch of Massachusetts wasn’t buying it. He pointed to Bear Stearns, and the fact that then-Secretary Paulson, Fed Chairman Ben Bernanke, and Geithner forced the firm to accept two cents on the dollar for their shares in order to receive bailout money. How was it Goldman and the other firms got such a sweet deal on this backdoor bailout via AIG?

“The money going into AIG is going right out to the counterparties,” said Lynch. “This is a pass-through. And the folks on the other side are Goldman Sachs–that’s a principal beneficiary. And we don’t negotiate a nickel–not a nickel, not a cent–off of what they’re getting. You’re saying, ‘Oh, the regulations were different.’ Let me tell you something, you were changing the rules and regulations every single day. You had every opportunity–every opportunity to weigh in on behalf of the American people and make these people take a new deal, make them take a haircut. You scalped the folks at Bear Stearns–two cents on a dollar, they got. The folks at Goldman Sachs got a hundred cents on a dollar. That is just unacceptable. Totally unacceptable.”

Lynch was fuming and went on to address the recusal issue. “Changing over to the Obama Administration–you get the same people who are relying on you. The American taxpayer when you’re in one job, and the American taxpayer when you’re in the other job,” he said. “I don’t see a conflict. You could have done the right thing by those people, and it just stinks to high heaven, what happened here. And to top it all off–the disclosure was not there. The disclosure was not there at the proper time to tell the American people, to tell this Congress, what was going on. And that is just inexcusable. And it makes me doubt your commitment to the American people. And I think the commitment to Goldman Sachs trumped the responsibility that our officials had to the American people.”

(So where exactly was Lynch when the Democratic primary for the Massachusetts Senate seat rolled around?)

“If it would have been possible, we would have done it,” Geithner replied. “Why would I have wanted to be sitting before you today having to defend actions that look like they could have been avoided? It comes down to this basic tragic choice: if you are prepared to default, you can impose haircuts. If you can’t accept the consequences of default, you do not have any leverage. It would have been vastly more expensive to the American taxpayer…if we had let that firm fail.”

“There was no shared sacrifice for Goldman Sachs and the American people,” Lynch shot back.

One witness on the third panel also questioned Geithner’s version of things–Neil Barofsky, the special inspector general for TARP (SIGTARP).

Barofsky took on the “tone and amount of effort” in the negotiations for concessions from the Wall Street and foreign banks. He said they were handled over the telephone by mid- and senior-level executives. These Fed officials informed their counterparts at the financial firms that negotiations were voluntary, and then asked would they be willing to take a haircut? Seven of the eight said no, and Secretary Geithner then made the decision to pay full value on the contracts.

Barofsky said this “stands in stark contrast” to negotiations just a few weeks earlier when the United States purchased $125 billion in preferred securities from nine banks–some of the same ones involved in the AIG negotiations–through TARP. The bank CEOs were summoned to a Treasury conference room in Washington, DC. NY Fed President Geithner, Secretary Paulson and Fed Chairman Bernanke were all present and insisted the banks take the money.

“Unlike with AIG, the message was forceful,” said Barofsky. “[They] made it very clear how important it was for the banks to agree. They used terms like ‘it would be good for the country’ for them to do so. No such similar effort was taken with respect to the AIG negotiations. Would it have made a difference? If President Geithner or Secretary Paulson got on the phone and talked with those chief executive officers, would it have resulted in the savings of billions or tens of billions of dollars for the US taxpayer? We don’t know. We can’t know. We’ll never know, because that effort was simply not taken.”

Barofsky also expressed concerns about a continuing lack of transparency around these matters. Documents regarding the AIG payments to the banks that were obtained by the Oversight Committee should have been turned over previously to SIGTARP for its investigation into these matters last year. Barofsky said that he will investigate “whether there was any misconduct relating to disclosure or lack thereof.”

Florida Republican John Mica asked for Geithner’s resignation–but mostly the Republican members wore their newfound populism like a kid forced to don a tie at church. Congressman Lynch gave Geithner that one serious dressing-down. And Representatives Kaptur and Dennis Kucinich pressed the secretary hard on how and why he made the decisions he made.

But in the end, there was no smoking gun in the 250,000 documents examined by the committee. Nothing to prove what Geithner knew about the nondisclosure, and when he knew it. No damning e-mail from him reassuring friends on Wall Street that this was all going to be taken care of.

Just the same question that has loomed over Geithner since his nomination: is this really the man the president wants presiding over key aspects of his economic recovery plan? And is this man capable of putting the people’s interests before the interests of Wall Street?