AIG tosses roadblocks at Geithner, financial reform

WASHINGTON (Reuters) - The latest storm of controversy over insurer American International Group Inc's massive bailout has thrown up obstacles for Treasury Secretary Timothy Geithner and his financial reform agenda, but is unlikely to cost him his job.

Geithner is set to testify next week before a congressional committee that is keen to explore what role, if any, he played in decisions on AIG payments to banks when he headed the New York Federal Reserve. At a hearing on AIG in November, one lawmaker had called on Geithner to step down.

However, analysts say lawmaker and voter anger over AIG won't be enough to force Geithner out of his job absent a "smoking gun" among the more than 250,000 pages of documents the New York Fed turned over to the U.S. House of Representatives Oversight and Government Reform Committee on Tuesday.

But friction caused by rehashing decisions to pay banks in full to retire $62.1 billion in credit default swaps sold by AIG, and whether disclosures about them were improperly limited, could help galvanize opposition to the Obama administration's reform plans among both Republicans and liberal Democrats.

Questions over Geithner's role could also undercut his ability to sell the reforms on Capitol Hill.

"Is Tim Geithner harmed by the controversy swirling around him over his role in AIG? Absolutely yes," said Allen Sinai, chief economist at Decision Economics in Boston.

"It's hard enough for the secretary of Treasury to make the tough decisions that are expected of him every day, much less have to make them while under a cloud of suspicion. Anything that impinges upon the credibility of the secretary of Treasury represents a significant impediment for him in performing his duties," Sinai said.

"DEEPLY OFFENSIVE" BAILOUT

Geithner has denied involvement in advice to AIG regarding public disclosures of the counterparty payments. He was recused from the matter when he was nominated for the Treasury job in late November 2008, around the time of recently disclosed email discussions between AIG and New York Fed lawyers over what to disclose about the payments in securities filings.

But on a number of occasions, Geithner has publicly defended the decision to allow AIG to pay counterparties in full, arguing it could not "selectively default" on obligations after the Fed and Treasury decided to bail the insurer out. He also regularly calls the bailout "deeply offensive."

Even as Geithner talks tough with big banks by proposing new fees, criticizing their bonuses and working to rewrite the regulatory map, the AIG matter has strengthened his association with Wall Street and bailouts.

"It reinforces that belief that he's part of the bailout culture and he's somehow corrupted," said Greg Valliere, a longtime Washington policy analyst with Soleil Securities in New York. AIG is "an embarrassment from a PR standpoint. It makes things difficult for the administration."

Reopening the AIG wounds provides more ammunition to lawmakers who are already angry at the Fed and its chairman, Ben Bernanke, for lax regulation and a failure to recognize the U.S. housing bubble as it developed earlier in the decade.

Under a House reform bill passed late last year, the Fed would gain significant abilities to impose tougher standards on large financial firms. The Senate, however, is considering stripping the Fed of bank regulatory authority.

AIG also hampers Geithner's credibility as a reformer among liberal Democrats who are frustrated with the Obama administration's slow progress in stemming home foreclosures, creating jobs and freeing up credit for small businesses.

"The bailout and his actions as head of New York Fed are going to come into conflict with what the Obama administration is trying to accomplish, which is going after the Big Banks and Wall Street," said Ethan Siegal, president of The Washington Exchange, an adviser to institutional investors.

"He has constant hurdles that he has to overcome."

(Additional reporting by Glenn Somerville, Editing by Chizu Nomiyama)