The chairman of a U.S. congressional panel said on Wednesday he wants all of Treasury Secretary Timothy Geithner's communications about the Federal Reserve's payouts to counterparties of insurer AIG Inc at 100 cents on the dollar after a government bailout.

Geithner was the president of the New York Fed in September 2008, when the government stepped in to rescue American International Group at a cost to taxpayers of $180 billion.

House of Representatives Oversight Committee head Edolphus Towns has called the Fed's decision to compensate in full firms that had contracts with AIG, a backdoor bailout. He said he has also subpoenaed Geithner's e-mails, phone logs and meeting notes about the decisions surrounding public disclosure of the counterparty payments.

New York Fed President William Dudley defended the central bank's actions surrounding the AIG rescue, saying the firm's collapse would have triggered a devastating cascade of failures.

AIG was a building on fire, he said in an interview with Nightly Business Report on PBS. We have acted completely in the spirit of the law, letter of the law, in everything that we've done.

Towns questioned why the Fed made full payments to some of the most profitable companies in the world when AIG was facing bankruptcy. He said AIG documents suggest the New York Fed wanted to keep details of the counterparty payments hidden.

When average people were losing their homes and their jobs, the Bush Administration decided to use taxpayer dollars to give a backdoor bailout to the biggest players on Wall Street, Towns said.

We need to understand why and how taxpayer dollars were used to bailout the same people who helped cause the financial crisis in the first place, the New York Democrat said.

Dudley said that when the government rescued AIG, it did not have the ability to decide who would lose money and who wouldn't.

People are arguing that we were trying to cover up who benefited from AIG, he said. But the fact is, it's very clear who was going to benefit from AIG not going bankrupt, all their counterparties - absolutely every last one.

Treasury has said that Geithner was recused from involvement in any matters related to AIG around the time that his nomination as Treasury Secretary was announced by the White House on November 24.

The Obama administration and New York Fed have said Geithner was not aware of any emailed advice by New York Fed lawyers to AIG to limit disclosures about payments it was making to banks on derivatives contracts.

Towns is also asking for emails, phone logs and meeting notes from former New York Fed Board Chairman Stephen Friedman, New York Fed General Counsel Thomas Baxter, and the New York Fed official responsible for monitoring the relationship with AIG, Sarah Dahlgren.

(Reporting by Mark Felsenthal; Editing by Andrew Hay)

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