WASHINGTON, DC - OCTOBER 07: Former U.S. Treasury Secretary Timothy Geithner walks to the U.S. Court of Federal Claims October 7, 2014 in Washington, DC. Geithner will be a witness and testify on a class action lawsuit brought against the U.S. government by shareholders of AIG claiming that the government violated their rights by grabbing a majority stake in the company as part of the 2008 bailout of AIG. (Photo by Win McNamee/Getty Images)

Tim Geithner, the former president of the Federal Reserve Bank of New York, has defended the 2008 bailout of AIG, telling a court he believed that allowing the insurer to fail would have been “catastrophic” and would have sparked “mass panic”.

Testifying in a lawsuit filed by former AIG chief executive Hank Greenberg, Mr Geithner disputed claims that the bailout “wiped out” shareholders, although he acknowledged having used that phrasing in the past.

Mr Greenberg is accusing the government of imposing illegally harsh terms on AIG and not properly compensating shareholders for its $182bn rescue. He is seeking $40bn in damages.

David Boies, Mr Greenberg’s attorney, pressed Mr Geithner on the calamity AIG’s failure would have caused, often rehashing Mr Geithner’s own words, including those he wrote in his book on the financial crisis, Stress Test.

Mr Boies has argued that government officials helped prevent a private rescue of AIG, partly by publicly insisting they could let the insurer fail even though they knew it had to be saved.

As evidence, he pointed on Tuesday to notes that Mr Geithner wrote for his book in which he said the bailout of AIG “effectively wiped out equity holders”.

“AIG provided equity to the government,” Mr Geithner said when pressed as to whether shareholders had been “wiped out”. He also said that, though he had used the phrase, it was not accurate because shareholders had been given a substantial benefit: without a rescue, AIG would have failed.

Mr Geithner was questioned about the dates in September 2008 when the terms for AIG’s rescue changed from warrants to preferred voting stock that represented a 79.9 per cent stake in the company. Mr Boies questioned the authority under which the bailout was made, contending that the Fed board did not vote to approve the final terms. Mr Geithner said he did not know the details.

Mr Boies also asked about a possible private sector consortium to participate in the bailout, which was cited in an email to Mr Geithner by a former Fed governor. Mr Geithner said any viable private sector solution that reduced risk for the Fed would have been welcomed, but none had come forward in a credible way.

Mr Boies also noted the different treatment AIG received compared to banks such as Morgan Stanley. While Morgan Stanley needed more assistance it was charged a much lower interest rate than the 14 per cent rate imposed on AIG, he said.

Hank Paulson, Treasury secretary in 2008, testified on Monday that AIG had received “punitive” terms. However, he said this had been necessary to prevent the “moral hazard” of encouraging excessive risk taking by other financial institutions receiving assistance, and to make the bailouts politically acceptable.

Mr Paulson’s testimony ended more quickly than expected, taking only two hours. But Mr Boies will continue to question Mr Geithner on Wednesday, after which the government will have a chance to question him. Former Fed Chairman Ben Bernanke’s testimony was delayed for a day to Thursday.

Facing questions from Mr Boies about the failure of regulators during the crisis, Mr Geithner said that constraints such as capital requirements that were imposed only on banks hurt the financial system as a whole.

“Risk migrated from banks to where constraints didn’t exist,” he said.

Mr Boies also brought up regulators’ failure to predict troubles at the banks they oversaw, including Citigroup. He has cited Citi throughout the trial as an example of a bank that paid billions of dollars in fines for crisis-related behaviour yet received government assistance on more favourable terms than AIG.

In a moment of levity, Mr Boies asked whether Mr Geithner held Mr Greenberg in high regard. After a pause, Mr Geithner said “I had a high regard but a complicated regard if I’m to be honest” amid laughter in the courtroom.

Mr Greenberg had called Mr Geithner before the AIG rescue was finalised in September 2008, according to call logs presented in court. But Mr Geithner declined Mr Greenberg’s offer of participating in the rescue, and the logs show that Mr Geithner was on the phone with Jeff Immelt, head of GE, four minutes later.

Mr Geithner was also questioned about a possible financing proposal for AIG being led by JPMorgan and Goldman Sachs. Although Mr Geithner did not recall the specific terms of that idea, which did not come to fruition, he acknowledged the interest rate the government charged was “significantly higher” than what the banks had proposed.

Get alerts on American International Group Inc when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article