Former Treasury Secretary Timothy Geithner didn’t fully understand the potential financial damage caused by the implosion of insurance giant American International Group (AIG) until the company was insolvent, and only then did he scramble to extend a controversial lifeline designed to help avert a broader demise of the financial system during the 2008 financial crisis.

That’s the upshot from Geithner’s sealed deposition in connection with a lawsuit filed in federal court by former AIG chief Hank Greenberg against the U.S. government over the legality of the government’s bailout of the insurance giant. The deposition covers Geithner’s role as New York Federal Reserve president when he was one of three top regulators in charge of the bailout of the banks during the financial crisis.

Geithner’s deposition -- reviewed for the first time by FOX Business -- provides a somewhat different take on his actions during the financial crisis than what appears in his new memoir, “Stress Test: Reflections on Financial Crisis.” In the book, Geithner portrays himself as having a firm grasp of the simmering financial crisis beginning with the March 2008 collapse of investment bank Bear Stearns.

But according to his deposition, Geithner’s knowledge of AIG -- and its importance to the financial system -- was less complete. AIG insured much of the toxic debt held by the big banks, meaning if the insurer was allowed to collapse, many of the nation’s top banks would fall into insolvency as they began to take losses.

Geithner said in his deposition that he met with former AIG chief executive Robert Willumstad at least three times during the summer and fall of 2008, brushed aside pleas from the company for aid and only began to focus on AIG’s problems after Lehman collapsed in mid-September of that year and the financial crisis went full throttle.

Along with former Fed chairman Ben Bernanke and former Treasury Secretary Hank Paulson, Geithner would eventually develop a plan to secure hundreds of billions of dollars in aid to prop up the trouble banking system. Geithner’s efforts would propel him to an even bigger job as President Obama’s Treasury Secretary in January of 2009, a job he kept until 2013 when he resigned to take a position at private equity firm Warburg Pincus.

Geithner, through a spokeswoman, declined numerous requests to comment, as did Paulson and Bernanke. Since leaving office, Paulson has published his own account of the financial crisis while Bernanke has said he will release his own account in the near future.

Paulson and Bernanke have also provided depositions as part of the Greenberg lawsuit, but after reviewing these documents, Geithner emerges as the most important player in the bailout drama. In fact, Bernanke suggested in his deposition that he agreed to the wider bailouts of the big banks as well as AIG largely after consultation with Geithner.

Paulson, meanwhile, appears to be the most politically astute of the regulators as he attempted to forge bipartisan support for the various bailout packages that emerged that year. Paulson is said to have briefed then House speaker Nancy Pelosi, and then House minority leader John Boehner, about a sweeping bailout plan.

Both told him they supported the effort formally known as the Troubled Asset Relief Program, or TARP, which was initially rejected by Congress before its ultimate legislative approval.

But the main focus of the depositions is the government’s bailout of AIG -- and whether, as Greenberg contends, the government’s efforts to prop up the insurer in 2008 were illegal because they were overly punitive to AIG shareholders like him compared to the other bailout recipients.

By virtue of the AIG bailout, firms like Goldman Sachs (GS) received billions of dollars in indirect assistance as AIG was make able to good on insurance contracts that covered toxic debt held by the banks.

Financial institutions such as Goldman and Morgan Stanley (MS) also received direct capital infusions from the government and shareholders of these and other banks recovered much of their losses as the financial system improved and the firms repaid government bailout money.

Since the terms of AIG’s bailout were more onerous, shareholders like Greenberg -- the former CEO who was ousted from the insurer in 2005 amid regulatory pressure -- suffered huge losses. Still, both Geithner and Bernanke defended their actions in response to questions from Greenberg’s attorney David Boies, the depositions show.

In his deposition, Geithner described his meetings during the summer and fall of 2008 with AIG chief Willumstad, who explained the increasingly difficult financial situation the company faced. Geithner, in his deposition, said Willumstad had told him during their last meeting -- just days before the September 15 collapse of Lehman Brothers -- that the insurer was on the verge of collapse as well and had become insolvent.

So what prevented an immediate bailout of AIG along the lines of what eventually took place with the big banks? The depositions show that Geithner as well as Bernanke worried about setting the precedent of moral hazard where firms suffer no consequence for excessive risk taking. The moral hazard dilemma was the principle reason government regulators allowed Lehman Brothers to fail after a private-sector bailout attempt couldn’t be reached.

But regulators had other concerns; the depositions show that Geithner and Bernanke questioned whether a loan to AIG would be properly secured so the taxpayers could recoup their money. Moreover, Geithner suggests in his deposition he didn’t fully understand the degree to which AIG’s demise would impact other banks until after Lehman fell.

Lehman filed for bankruptcy on Monday, September 15, 2008, and its downfall is considered one of the main triggers of the broader collapse of the nation’s banking system. 

Another major trigger was AIG’s demise. Geithner said in his deposition that he hadn’t focused on AIG’s problems until the weekend of the Lehman collapse, though he was being briefed on it by his staff.

He finally came to the decision that AIG needed government assistance “Sunday or early Monday.” It was at that time, depositions show, that regulators determined that “the equity in AIG was around zero” and by saving AIG they could prevent the financial crisis from spreading.

The official decision to bail out AIG came during a hastily called meeting of the Federal Reserve Board on September 16, depositions show. That’s when Geithner proposed a take-it-or-leave it deal to AIG officials in which the federal government would own more than 70% of the company, thus nearly wiping out the value of stock held by shareholders but saving the company from bankruptcy.

The bailout would become one of the most debated parts of the federal government’s response to the financial crisis; the government would essentially cover all of AIG obligations to big banks and own one of the world’s largest insurers, thus handing them billions of dollars in aid.

The effort also slowed down the spreading financial collapse, paving the way for a bigger bailout in the following days known as TARP, when it became clear the banking crisis could plunge the country into another Great Depression.

But Geithner’s deposition in the AIG lawsuit will likely provide ammunition to those who believe he was caught off guard by the troubles in the financial system and then used the power of the government to support Wall Street.

What made AIG so important to the financial system was a little known business of insuring debt held by banks through a derivative known as the credit default swap. Thus, if AIG fell, those bonds would be declared worthless. The big banks would have to write down massive losses, leading to their insolvency.

But the depositions show that regulators had no clear idea the full extent of AIG’s exposure to such instruments -- or how much the banking industry relied of this form of insurance -- at least until the financial system started to unravel in mid-September 2008.

Nor did they attempt a possible private-sector bailout of AIG until the crisis hit. Regulators, for instance, did not seriously consider a plan by Greenberg’s to have a large Chinese bank provide a rescue package, the depositions show.

Geithner readily admits as much in his deposition, stating that he personally “did not spend time” during the Lehman crisis that occurred during the weekend before its September 15, 2008, bankruptcy “looking at AIG.”

Geithner, according to his deposition, believed “it wasn’t appropriate to bail out AIG” because unlike other big firms AIG was an insurance company and not a bank, one person with direct knowledge of the deposition said.

Bernanke in his deposition said a government bailout in terms of a loan to AIG posed significant risk to the taxpayer given AIG’s troubled status.

But AIG wasn’t an ordinary insurance company. Once Lehman collapsed, the financial system began to shut down, putting every major bank on the verge of collapse as large creditors refused to lend money and the markets started to tank. The final straw to a broader demise was AIG which had insured much of the troubled debt held by the banks.

One major worry for regulators was Citigroup (C), once the nation’s largest bank, which held nearly a $1 trillion in customer deposits that the government insured. Paulson believed Citigroup would become insolvent even after the initial round of bailouts in September 2008, but also in late November of that year, the depositions reveal.

Geithner said in his deposition that he received word that two of the largest investment banks were likely to fail as well. In his deposition, he said officials at Morgan Stanley were worried the firm would soon implode as Lehman had, and that Goldman was then “freaking” that it too would be “toast,” his deposition shows.

One of the remedies offered by regulators was to allow Morgan Stanley and Goldman to become bank holding companies with access to credit from the Federal Reserve lending. Both would later receive billions of dollars in government assistance to remain afloat, as well as indirect aid from the AIG bailout.

The notion that officials at Goldman believed that the firm was also heading for insolvency during the crisis days runs counter to the post-bailout narrative offered by senior Goldman Sachs officials including CEO Lloyd Blankfein that the firm had strong enough finances to survive and that its exposure to AIG was largely hedged.

A Goldman spokesman declined to comment.

Charles Gasparino joined FOX Business Network (FBN) in February 2010 as Senior Correspondent.