I'm no fan of Timothy Geithner and think he should be fired for different reasons, but might I play devil's advocate?

AIG was more than aware that the U.S. government would never let it collapse. It's arguable that they literally couldn't given how connected they were to the rest of the financial sector through their psuedo-insurance policies in the name of "credit protection."  So, consider this scenario. We have Timothy Geithner who needs to assure that AIG does not collapse. He cannot let AIG fail under any circumstances. The executives of AIG are all too aware of this. There company will fail if they do not enter an agreement with the U.S. government of some form. AIG will, logically, attempt to get the best deal possible. So, Geithner originally offered a lesser amount and it was turned down by AIG. AIG knows with near certainty that the government will bail it out, because it is mostly necessary. So, what incentive do they have to agree to a lower pay-out? No incentive exists there. While superficially it would appear that AIG was desperate, in reality, it had a substantially stronger hand at the bargaining table. Geithner and the government were not going to let them collapse, so why would they work with them? They would keep saying, "no", "no", "no" until the government finally caved in.

This was actually one of the reasons why I didn't like the TARP program, because it set up this type of scenario where the banks had so much more power at the bargaining table.