Is Timothy Geithner tough enough to be an effective US treasury secretary? The Obama administration's finance man is getting a true kicking today over his role in last year's botched bail-out of AIG in which Wall Street banks seem to have run rings round the government.

Geithner was chairman of the New York Federal Reserve which led an $85bn effort to salvage AIG when the insurer was wobbling on the edge of bankruptcy in September last year. The inspector-general appointed to oversee the US government's bail-out efforts, Neil Barofsky, has produced a scathing report today attacking poor negotiation, ineffective contingency planning and a lack of public openness in the handling of this rescue.

"How can Geithner survive this?" demanded the Huffington Post in a banner headline this morning. Congress is investigating the AIG bail-out which, in the eyes of both Democratic and Republican critics, was a dismal saga of government officials crumbling under pressure from Wall Street. One Republican, Darrell Issa, has already raised questions about the "transparency, accountability and wisdom" of the New York Fed's actions.

Having pumped $85bn of taxpayers' funds into AIG, the Fed is accused of allowing $32.5bn to flow out of the insurer's back door to satisfy, in full, the major counterparties to the company's disastrous credit default swaps - including Goldman Sachs, Merrill Lynch, Societe Generale, Barclays and Deutsche Bank.

Critics argue that instead of paying out these clients in full, the Fed ought to have taken a tough negotiating line to safeguard public money. It seems that the Fed did politely ask each of the banks concerned to take a "haircut" but, unsurprisingly, they all politely declined - with the exception of UBS which offered a 2% reduction. France's banking regulator stepped in to say that two banks - SocGen and Calyon - would have to get their full payout under French law, which seems to have torpedoed any further discussion.

The inspector-general is dismissive of this approach, pointing out that an insistence by the Fed on treating every bank equally gave each institution "effective veto power" over any deal. Geithner's negotiating strategy, says the report, "had little likelihood of success" in spite of the fact that the Fed ought to have held a trump card - that without its intervention, AIG would have gone bust and the banks would have been left severely out of pocket.

This weakness is very fishy - particularly when, as Barofsky points out, the US government felt able to demand very considerable concessions from creditors of General Motors and Chrysler following the motor companies' bail-outs. Wall Street seems to have more sway than humble Midwestern car parts suppliers.

On top of that, the Fed initially refused to disclose the identity of AIG's counterparties, warning that exposure could further undermine the insurer and jeopardise the stability of the markets. When, under intense political pressure, the amounts paid to individual banks were published, the inspector-general points out that "the sky did not fall". He says that a fundamental principle was compromised - "the public is entitled to know what it being done with government funds".

It all adds up to a sorry picture and casts Geithner in a particularly poor light. It hardly inspires confidence in the man now charged by the Obama administration with devising ways to crack down on reckless risk-taking and telephone-number sized bonuses on Wall Street.