“Late in the day Tuesday, Mr. Boies pressed Mr. Geithner on how the government came up with the higher interest rate that would be levied on AIG. Mr. Geithner said the rate was based in part on an assessment made by J.P. Morgan Chase & Co. and Goldman Sachs in the 11th-hour effort.”, Wall Street Journal
“So JP Morgan and Goldman, who both received billions from the government’s bailout of AIG and also directly from the government through TARP and other programs….set the rate for AIG?????……Unbelievable!!!!”, Mike Perry, former Chairman and CEO, IndyMac Bank
Geithner: AIG Rescue Prevented Catastrophe
By Damian Paletta and Leslie Scism
WASHINGTON— Timothy Geithner, one of the highest-ranking government officials during the financial crisis, testified in federal court Tuesday that he thought a failure of American International Group Inc. would have had catastrophic consequences.
He conceded that he once said the government’s rescue “wiped out” the company’s shareholders, in a nod to the harshness of the terms.
Mr. Geithner, president of the Federal Reserve Bank of New York when AIG nearly collapsed, parried with trial lawyer David Boies on Tuesday in the U.S. Court of Federal Claims as part of a lawsuit brought by AIG’s former longtime chief executive, Maurice R. “Hank” Greenberg. The suit alleges that the government cheated shareholders of $40 billion when it took a 79.9% equity stake without justly compensating them.
The class-action suit was filed in 2011 by Starr International Co., an investment and charitable firm run by Mr. Greenberg that was AIG’s largest shareholder in 2008.
While no smoking guns have emerged, Mr. Boies has been pulling together an array of material seeking to prove Starr’s contention that senior government officials considered the treatment of AIG shareholders to be extremely punitive, even as they believed that AIG must accept the terms because the damage from an AIG bankruptcy would be so widespread. A key part of the lawsuit is that the government forced the rescue package’s onerous terms on AIG, rather than AIG voluntarily accepting the deal, as the government maintains.
It is unclear at this early stage of the six-week trial where things stand with the federal judge hearing the case in the U.S. Court of Federal Claims.
Mr. Boies asked repeatedly if Mr. Geithner thought the failure of AIG would have catastrophic consequences, and Mr. Geithner said yes.
Later, in the afternoon, Mr. Boies introduced materials that were part of Mr. Geithner’s preparation for his book, “Stress Test.” In the material, Mr. Geithner detailed how he had called AIG’s then-chief executive, Robert Willumstad, and said: “We’re going to send you a term sheet. You’re not going to like it but you have [a few hours] to get your board to approve it.” Mr. Geithner said they gave AIG a deadline and told Mr. Willumstad he wouldn’t be running the company because a new CEO would take over.
Mr. Boies asked whether Mr. Geithner had ever said the government “wiped out” AIG shareholders. Mr. Geithner acknowledged that he had used such a phrase, though he described it as inartful. This could prove significant in the case, because the plaintiffs are trying to prove that the government was overly punitive.
Mr. Geithner’s testimony is scheduled to continue Wednesday, with former Federal Reserve Chairman Ben Bernanke to follow on Thursday and Friday. Mr. Geithner, who later served as Treasury secretary under President Barack Obama and who is now an executive at private-equity firm Warburg Pincus LLC, testified after former Treasury Secretary Henry Paulson, who was on the stand for about two hours on Monday.
Mr. Geithner’s questioning, which began in the morning and concluded at 5 p.m., was detailed and often tedious, with Mr. Geithner answering, “I don’t know” or “I don’t recall” dozens of times. He spent much of the hearing folding and unfolding his reading glasses, listening to questions, at times smiling, chuckling and on more than one occasion looking perplexed. The day was a long, slow slog through emails, memos, notes and often unsuccessful efforts to jar loose specific conversations from Mr. Geithner’s memory about the events of 2008.
Mr. Boies also peppered Mr. Geithner with questions about the terms of federal assistance to other financial firms such as Citigroup Inc. and Goldman Sachs Group Inc., as part of shareholders’ case that the AIG package was unlawful in its effort to penalize the company while other firms received more favorable aid packages.
Mr. Geithner said he didn’t recall precise interest rates or other details, despite repeated questions. “The precise rate varied across the facilities and depended on circumstances,” he testified.
AIG, whose primary business is selling property-casualty and life insurance, got into serious trouble by selling large volumes of an unregulated type of insurance that protected banks and other large clients against losses on complex mortgage bonds. In September 2008, AIG faced collateral calls amounting to billions of dollars tied to the product and increasingly had trouble finding the money, culminating in a plea to the government on Sept. 16, 2008, for help.
In the rescue, the government acquired its 79.9% ownership stake in AIG in exchange for providing an $85 billion collateralized loan. The rescue package, which AIG has fully repaid, ultimately swelled to $184.6 billion in assistance and a 92% government stake.
The suit also contends that the government overstepped the boundaries of the law in demanding the equity stake and that it unlawfully imposed harsh terms to penalize AIG for its alleged recklessness. Besides the equity stake, the loan’s interest rate is also at issue: a minimum 12% a year, which the New York Fed’s general counsel referred to in testimony last week as “loan sharky.”
The AIG pact’s terms were based on those of a potential private-sector consortium loan to AIG that two Wall Street firms had unsuccessfully sought to put together in mid-September 2008, according to court documents. The private-sector loan called for a minimum 10% interest rate, the New York Fed lawyer testified last week.
Late in the day Tuesday, Mr. Boies pressed Mr. Geithner on how the government came up with the higher interest rate that would be levied on AIG. Mr. Geithner said the rate was based in part on an assessment made by J.P. Morgan Chase & Co. and Goldman Sachs in the 11th-hour effort.
Mr. Geithner acknowledged that the rate the Fed ultimately settled on for AIG was “significantly higher than the interest rate” in the private-consortium effort. He said that officials had “a whole range of market indicators” that played into setting the interest rate.
The grilling of Messrs. Bernanke, Geithner and Paulson is raising the profile of a lawsuit once seen as a long shot to even make it to trial.