UPDATE 2-Geithner denies role in AIG payment disclosures

* Geithner says didn’t tell AIG to keep quiet on payments

* U.S. Treasury chief faces anger at ‘backdoor bailout’

* Taxpayers unlikely to get back all money pumped into AIG

* AIG collapse would have risked economic catastrophe

(Recasts lead, adds details, background)

By Glenn Somerville and David Lawder

WASHINGTON, Jan 26 (Reuters) - U.S. Treasury Secretary Timothy Geithner flatly denied any role in counseling American International Group AIG.N to keep quiet about payments it made to leading banks during a 2008 rescue of the stricken insurer.

Geithner faces a grilling on Wednesday before the U.S. House of Representatives Oversight and Reform Committee, whose chairman has complained that taxpayer funds were fed through AIG in what amounted to a “backdoor bailout” of big banks.

A committee member made Geithner’s prepared testimony to the committee available on Tuesday night.

In the remarks, Geithner said he was not involved in decisions about payments to banks that were counterparties for credit default swaps written by AIG that they were able to exit at 100 cents on the dollar at the height of the financial crisis.

“I had no role in making decisions regarding what to disclose about the specific financial terms of Maiden Lane II and maiden Lane III and payments to AIG’s counterparties,” he said.

The Maiden Lane funds were special entities set up by the New York Fed to buy and hold securities underlying the credit default swaps and the securities may be sold in future.

In total, over $180 billion went into bailing out AIG, a sum that infuriates lawmakers and the public, all the more so since $62.1 billion flowed right out AIG’s doors to big banks.

AIG was the world’s largest insurer at the time of the bailout, operating in more than 130 countries, but got into trouble because of risky bets by its financial products division which were unrelated to its insurance business.

Geithner said the bailout was forced upon the government because letting AIG collapse could have triggered “catastrophic” economic consequences, and pointed out the New York Fed had worked closely with the Treasury department and Federal Reserve board in Washington on the rescue.

A spillover of anger over the AIG bailout threatened for a time to derail Fed Chairman Ben Bernanke’s bid for a second term as U.S. Fed chief, but by Tuesday support appeared to be building for approval in a full Senate vote later this week.

Geithner acknowledged the government “is still exposed to substantial risk of losses on its investments in AIG” and said it was unlikely to fully recover the costs of Treasury’s capital investments in the company.

But he said that as market conditions improve, the losses may be lower than thought a few months ago.

Geithner was president of the New York Federal Reserve bank at the time the AIG bailout was initiated but he said he withdrew from any decision-making when he was nominated by President Barack Obama in November to be Treasury chief.

“Starting on Nov. 24, I withdrew from involvement in monetary policy decisions, policies involving individual institutions and day-to-day management of FRBNY (the New York Fed bank),” he said.

While that seemed likely to shield him from sharp questioning about AIG’s decision to withhold the information for months that it was paying banks at par to settle swaps deals, Geithner was bracing for demands about why banks weren’t forced to take a discount, or “haircut”, on the deals.

Geithner said the New York Fed could not force banks to take less than par because that information might make markets lose confidence in AIG and force it into bankruptcy. The government had no means to wind down, or resolve a failing financial firm of AIG’s size -- and still does not -- so it had to bailed out.

Among the scheduled witnesses is Geithner’s predecessor as Treasury secretary, Henry Paulson, whose prepared remarks followed the same line as Geithner’s that there was no choice except to rescue AIG and to claim credit for doing so.

“We had to intervene, and I am thankful that we did,” Paulson said in prepared remarks released on Tuesday.

Paulson headed Treasury from 2006-2009 in the former Bush administration and is preparing to release a book Feb. 1 titled “On the Brink” about the onset of the financial crisis that pushed the United States into its longest recession in 70 years.

Geithner said Treasury still needs power to limit risk-taking by banks and other financial firms if they pose a threat to the stability of the financial system, something that President Barack Obama has called for but that Congress would have to approve.

In addition, the government should have the ability to wind down, or resolve, big financial firms that are failing so that it is not again forced into a position of having to bail out companies just because they are too big to close down. (Reporting by Glenn Somerville and David Lawder; Editing by Kim Coghill)