Ex-New York Fed, Treasury chief Geithner grilled in court over handling of 2008 bailout of AIG

Economic Indicators Associated Press

Timothy Geithner, a key player in the U.S. government's 2008 bailout of American International Group Inc., is due back in court Wednesday in a trial of a lawsuit filed by the insurance giant's former CEO over the handling of the rescue.

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On Tuesday, Geithner affirmed his belief that the bailout was needed to avert disaster for the financial system. Geithner was president of the New York Federal Reserve at the time of the rescue and later Treasury secretary.

A lawyer grilled Geithner at the trial of the lawsuit brought by former AIG Chairman and CEO Maurice Greenberg. He is suing the federal government for about $40 billion in damages, asserting that it violated the Constitution's Fifth Amendment by taking control of the insurance giant without "just compensation" for the shares it received.

The $85 billion loan package for AIG, which was teetering toward bankruptcy in September 2008, gave the government control of 80 percent of the New York-based company's stock. While upholding the necessity of the AIG bailout, Geithner in his testimony Tuesday also acknowledged that he had said the bailout "wiped out" AIG shareholders.

That statement was in line with testimony Monday by former Treasury Secretary Henry Paulson, who said the AIG bailout was specifically designed by the government to punish the company. Paulson, who headed the Treasury Department at the time of the rescue, said AIG shareholders should have faced punishment for the company's troubled balance sheet.

Geithner is expected to return Wednesday for a second day of testimony in the trial at the U.S. Court of Federal Claims in Washington. Former Fed Chairman Ben Bernanke is scheduled to testify later in the week.

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Geithner was questioned for a full day by Greenberg's attorney, David Boies. Geithner reconstructed in detail the New York Fed's deliberations over and decision to extend the aid to AIG, and its discussions with AIG executives on terms for the loan. He frequently said he couldn't recall specific facts or details.

He said he was "deeply involved" in discussions to determine an interest rate for the loan to AIG, which was set at about 12 percent annually.

Boies read from a Sept. 17, 2008 document written by a New York Fed official saying "AIG was told this was 'take it or leave it.' Nothing could be negotiated."

With Geithner giving AIG's then-CEO Robert Willumstad an hour or two to get the company's board to approve the terms, Boies asked Geithner, "You gave them a deadline, correct?"

Answered Geithner: "I don't know ... how I framed the deadline, but I made clear that we had very little time."

Geithner also acknowledged concern among New York Fed officials that AIG shareholders could vote to reject the government's terms for the loan.

In a moment of levity during the tedious back-and-forth, Boies — a famed litigator known for his fight for gay marriage and advocacy of Al Gore before the Supreme Court in the 2000 election — asked Geithner whether he had a "high regard" for Greenberg. "I had ... I would say a complicated regard for him, just to be honest about it," he replied.

AIG nearly collapsed after making huge bets on mortgage investments that later soured. Federal regulators were concerned that if it were allowed to fail it would send shock waves through the financial system, which was already reeling after Lehman Brothers collapsed in September of 2008.

AIG became a symbol for excessive risk on Wall Street and a touchstone of public anger. It was criticized, among other things, for paying millions of dollars in bonuses to executives after it was bailed out.

The $85 billion loan package eventually grew to $182 billion in government aid, which AIG has since repaid. The company has returned to profitability, and its stock has risen more than 45 percent over the past two years.