The failure in 2008 of American International Group Inc., the world’s biggest insurer, would have caused “mass panic on a global scale,” Timothy Geithner, the head of the Federal Reserve Bank of New York at the time, testified at a trial over the government bailout of the company.
Geithner, one of three architects of the U.S. response to the 2008 financial crisis, rebutted claims by Maurice “Hank” Greenberg’s Starr International Co., then the largest AIG shareholder, that the government illegally took equity in the insurer. Geithner was responsible for setting what a Starr lawyer called “an extortion rate” of 14 percent on an $85 billion loan to AIG.
Letting the company fail “would have been catastrophic for the broader economy,” Geithner said Tuesday. “Those options, yes, they existed for us theoretically, but if we had pursued them, they would have been catastrophic in impact.”
Starr is seeking at least $25 billion in damages for shareholders at the trial in federal court in Washington. The company claims the government punished AIG, which Greenberg led for almost 40 years, by demanding equity and imposing a far higher interest rate than other bailout recipients, such as banks, had to pay.
Monday, Geithner’s predecessor at Treasury, Henry Paulson, finished his testimony well ahead of schedule with short, direct answers such as, “You betcha.” In contrast, Geithner has been more cautious, frequently telling Starr’s lawyer David Boies that he didn’t remember details of AIG’s rescue effort.
When asked by Boies how much financial help AIG received as the fiscal and credit crisis deepened in 2008, Geithner responded, “I don’t carry those numbers around in my head.”
Several copies of Geithner’s book, “Stress Test,” some with pages marked with Post-it notes, lay in front of the lawyers, fodder for questioning ahead. Boies used a similar tactic Monday, focusing on key pages in Paulson’s book, “On the Brink,” in questioning him.
Geithner didn’t explicitly address whether he thought the government was obligated to save AIG. He said he was involved in determining the terms of the AIG bailout, including the interest rate, the amount of the loan and the requirement for surrender of equity.
The case is being heard without a jury by U.S. Court of Federal Claims Judge Thomas Wheeler. Ben Bernanke, the former chairman of the Federal Reserve, is scheduled to take the stand Wednesday.
Paulson Monday testified that regulators imposed harsh terms on AIG to send a message to markets that government help would cost them. The government avoided punitive terms for banks because it feared doing so would encourage short sellers to attack them, further destabilizing the economy, said Paulson, who was chief executive officer of Goldman Sachs Group Inc. before being named Treasury Secretary by President George W. Bush.