In a rare show of bipartisanship in Congress, both sides of the political aisle attacked an increasingly testy Treasury Secretary Timothy F. Geithner over his role in the rescue of insurer American International Group in a fiery hearing that had one Congressman calling for his resignation and another saying his behavior "stinks to high heaven."

As head of the New York Federal Reserve in the fall of 2008, Geithner signed off on making 100% AIG's trades entered into by counterparties such as Goldman Sachs, Societe Generale and Calyon, even though another counterparty, UBS, had accepted a haircut.

The counterparties were made whole to the tune of $62.1 billion, trades that represented declining real-estate linked trades with AIG.

Geithner also said he played “no role” in the decision to limit information disclosed about the bailout to taxpayers, noting he had recused himself because he was asked by President-elect Barack Obama to be Treasury secretary.

The criticisms came fast and furiously.

Democrat Stephen Lynch (D-Mass) said to Geithner of his actions: “You were not consistently on the side of the US taxpayer. You were supposed to protect the taxpayer..and you didn't.”

Geithner and his cohort at the Fed, in their defense, said that any pressure to take haircuts on the AIG counterparties was “an abuse of regulatory authority..it is simply inconsistent with the rule of law,” reads a prepared statement from Thomas Baxter, general counsel for the Federal Reserve Bank of New York.

To which Lynch retorted: “We were changing the rules and regulations every day under section 13 of the Federal Reserve act [a rule stretched thin by regulators to bail out companies under ‘exigent' circumstances] to bail out companies, we were opening the Fed discount window to non banks, so why you could not get the AIG counterparties to take a haircut is totally unacceptable, it was a terrible decision on your part.”

When Geithner defended himself by repeating what he has said in the past, that AIG was at risk of default during the negotiations to get these reductions, Lynch dismissed his Armageddon-defense.

“There's a big difference between giving them [the counterparties] 100 cents on the dollar and an AIG default,” he said.

Geithner could not answer why not making counterparties like Goldman Sachs' 100% whole on its AIG trades posed systemic risk to the nation, and why he couldn't force the French firms Calyon and Societe Generale to quit it with their demands that U.S. taxpayers cover their AIG bets 100%, despite the fact that UBS was willing to take a haircut.

He also couldn't answer why the Fed had to give out any money at all since the triple-A rated U.S. was backing AIG's balance sheet.

And when Geithner said he recused himself from the decision to not disclose to taxpayers the fact that the Fed opted to remunerate at 100 cents on the dollar the AIG counterparty trades, Lynch retorted, “Your changing over to the Obama administration, I don't see a conflict there, your duty was to the US taxpayer. It stinks to high heaven. I don't like the obfuscation, it makes me doubt your commitment to the American people.”

Lynch also questioned why the government, under Paulson, had forced banks to take TARP money, but somehow couldn't get the counterparties to take a haircut. “There was no shared sacrifice from Goldman Sachs for the American people,” Lynch said.

And Rep. John Mica (R-Fla) said Geithner offered “lame excuses on not paying taxes, and you're offering lame excuses now,” adding, “why shouldn't we ask for your resignation now” because “you have been incompetent on the job, and those are grounds for your removal.”

The White House continues to state its support for Geithner.

After Geithner was named a candidate for the Treasury post, disclosures soon arose about numerous instances of his failure to pay federal taxes.  

The House Committee on Oversight and Government Reform has disseminated internal New York Fed e- mails in its ongoing investigation into whether Geithner and then Treasury Secretary Henry Paulson, among other officials, misled the public about the bailout of AIG.

Former Treasury Secretary Paulson, New York Fed General Counsel Baxter and Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, were also called in to testify.

In his prepared remarks, Geithner told the panel that if the U.S. forced AIG's counterparties to accept less than what they were owed, markets would have lost confidence in the company and the firm's credit rating would have been downgraded.

That downgrade was a serious threat, Geithner said, as AIG was about to report $25 billion in quarterly losses at the time. “Another downgrade would force AIG to pay out billions more to its counterparties and could give banks the right to terminate contracts and keep the collateral—moves that would likely send the insurer spiraling toward bankruptcy,” Baxter said in his prepared statement.

Geithner walked a razor-thin high wire act in his defense, including saying that felt he had no leverage over the AIG counterparties, despite the fact that he was head of the NY Fed at the time.

Geithner also told the panel that the Fed had no leverage forcing AIG's counterparties to take any haircuts because the US government at that time became a creditor of AIG—even though the government could have yanked that line of credit and threatened bankruptcy.

On September 16, 2008 the New York Fed lent up to $85 billion to AIG through a secured revolving credit facility. In early October of 2008, the Board of Governors approved an additional secured credit facility that permitted the New York Fed to lend AIG up to $37.8 billion.

In his prepared statement, Baxter tried to argue that even if AIG defaulted, and filed for bankruptcy protection, “the counterparties would have been made whole [anyway] if they had sold the CDOs for fair value”--even though creditors in a bankruptcy are always forced to accept less than 100% on the dollar.   

Baxter also noted that if the government had let AIG fail, that would have triggered a run on money market funds, which held $20 billion in AIG commercial paper, four times the sum they held in Lehman commercial paper. The Reserve Primary Fund, the nation's oldest money fund, broke the buck after Lehman collapsed and fought a run on the fund.

Baxter also said that state and local governments, as well as 401(k) accounts, would have lost money in the event of an AIG failure. “Many of AIG's insurance subsidiaries likely would have been seized by their state and foreign regulators, leaving U.S. policyholders facing considerable uncertainty about their rights and claims,” Baxter added.

The AIG bailout testimony also tossed spotlights on another Wall Street player that played a key role in the Fed's decisions.

On Nov. 5, the New York Fed received a presentation, a 44-page analysis put together by a unit of BlackRock Inc., saying that the banks had significant bargaining power with AIG and had little incentive to cancel the contracts unless they received par, or 100 cents, on the dollar.