U.S. lawmakers on Wednesday challenged Treasury Secretary Timothy Geithner's credibility after he said he was not involved with AIG's decision to withhold details on $62 billion the bailed-out insurer paid to banks.

Geithner held his ground at a hearing, however, insisting the government-funded rescue which cost more than $180 billion had been necessary to avert an economic collapse.

Big taxpayer-funded bailouts for AIG and other financial institutions at a time of soaring unemployment have angered voters. Economic worries helped put a Republican into a long-held Democratic Massachusetts Senate seat last week, serving notice to lawmakers facing reelection in November.

Why shouldn't we ask for your resignation as secretary of the Treasury? Florida Republican John Mica demanded. I think you're punting the blame ... I believe we're not getting the whole story.

The populist backlash has heaped pressure on Geithner and threatened to scuttle Ben Bernanke's bid for a second term as chairman of the Federal Reserve -- the U.S. central bank. Both men are architects of the financial rescue.

Democrats and Republicans expressed doubt that Geithner, who led the New York Federal Reserve Bank at the time, could have been in the dark over a decision by AIG not to disclose for months details of the billions of dollars the insurer paid to banks to settle swaps contracts.

The payments amounted to letting Wall Street loot the corpse after the government had propped up AIG, said Edolphus Towns, a New York Democrat, who chairs the U.S. House of Representatives Oversight Committee.

There were several exchanges during the committee's hearing in which lawmakers questioned why a better deal for taxpayers could not have been negotiated when money was being poured into the stricken insurer.

Geithner held steadfast to his defense that he had withdrawn from decisions by the New York Fed after he was nominated to the Treasury post in late 2008 and forcefully defended his role in helping rescue American International Group Inc .

For the first time since the Great Depression you were seeing a full-scale run on the financial system, Geithner said, his temper occasionally flaring.

He said he had no role in making decisions regarding what to disclose about specific financial terms of the AIG rescue in November 2008, a bailout that eventually grew to cost more than $180 billion.


Geithner ceded little ground during the 2-1/2-hour grilling but did express some remorse at AIG-related decisions taken by the New York Fed after he had recused himself last fall when he was nominated to the Treasury post.

In retrospect I wish I'd known that AIG was keeping details quiet about the names and amounts of payments it was making to banks, he said.

Geithner insisted, however, that the decision to save AIG was the best of a terrible set of choices the government faced. People were taking their savings out of the banks, they were wondering if a dollar was a dollar ... There was a basic calamitous breakdown in the fabric of our system.

Henry Paulson, who was Treasury secretary when the initial decision to bail out AIG was taken, denied any knowledge of AIG's payments to banks, saying the Fed had authority to deal with counterparties, but he backed Geithner's position that an AIG rescue was necessary.

The decision to rescue AIG was correct and I strongly supported it, he said.

Lawmakers are incensed that AIG paid counterparty banks 100 cents on the dollar to settle the swaps deals after the insurer received taxpayer funds, and some fear a cover-up. Published reports at the time said payments were made at par but public attention didn't fully focus on that fact until months later.

Several lawmakers protested that not enough effort was made to negotiate haircuts or discounts with bankers and that New York Fed officials had concurred with an AIG decision not to reveal the names of banks that got payments or the amounts.

Democratic staff members said they had found no evidence in hundreds of thousands of pages of documents subpoenaed by the committee to suggest Geithner was directly involved in decisions on the bank payments.

Rep. Dan Burton, an Indiana Republican, said, however, that it stretches credulity to believe that Geithner was not aware that AIG was keeping quiet on details of its payments to banks.

(Editing by James Dalgleish)