Geithner Testifies He Was Responsible for AIG Loan Rate

By and | October 8, 2014

Timothy Geithner backed away from two of his more provocative assessments of the 2008 bailout of American International Group Inc., in a day of courtroom testimony marked by careful answers and a lack of recollection about the details of the financial rescue he helped oversee.

Timothy Geithner arriving at court. Bloomberg Photo/Andrew Harrer
Timothy Geithner arriving at court.
Bloomberg Photo/Andrew Harrer

Geithner, who headed the Federal Reserve Bank of New York at the time of the bailout, shed little new light on how he set the interest rate for AIG’s rescue loan, a key question in a lawsuit by Maurice “Hank” Greenberg’s Starr International Co. challenging the terms of the government’s assistance to AIG.

Greenberg claims the bailout terms, including the government taking an 80 percent of the insurer’s stock, cheated AIG shareholders and is seeking $25 billion in damages. Geithner, as the second of three major architects of the bailout to testify in the federal court trial in Washington, was proceeded on the stand by former Treasury Secretary Henry Paulson and will be followed by former Federal Reserve Chairman Ben Bernanke.

Geithner’s testimony covered what Starr lawyer David Boies called “an extortion rate” of 14 percent on an $85 billion government loan to AIG.

Responding to Boies’s questions, Geithner acknowledged, “Ultimately I was the one responsible for setting that rate.” He testified that it was modeled in part on a contemplated though never completed private rescue of AIG to be led by JPMorgan Chase & Co. and Goldman Sachs Group Inc.

Moving Quickly

Boies asked Geithner if he ever saw anything in writing describing a rationale for the rate.

“I don’t believe so. We were moving kind of quickly,” Geithner said.

He responded “I don’t know” or “I don’t recall” to a series of questions about who drafted the proposed terms for AIG, whether he had ever seen a term sheet from private lenders and whether the terms were shared with AIG.

Geithner said his information about the proposed terms for AIG were conveyed to him verbally by “someone I deemed authoritative” at the New York Fed whose name he could not recall.

Boies didn’t conclude his questioning of Geithner, who is scheduled to return to the witness stand today. Bernanke, who had been set to begin his testimony today, is scheduled to testify tomorrow.

AIG Punished

Geithner was named Treasury Secretary by President Barack Obama, a Democrat, in January 2009, serving until January 2013. He currently is president and managing director of Warburg Pincus LLC.

Starr was AIG’s biggest shareholder when the financial crisis struck. It claims the government punished AIG, which Greenberg led for almost 40 years, by demanding 80 percent equity and imposing a far higher interest rate than other bailout recipients, such as banks, had to pay. That stake later rose to as much as 92 percent after further government assistance.

Geithner attempted to take back a statement he’d made earlier about AIG shareholders being “effectively wiped out” by the bailout.

“It’s true I used the phrase,” Geithner told Boies. “It wasn’t completely accurate” because shareholders were provided with a substantial benefit as a result of the rescue, he said.

Geithner also backtracked slightly from a comment he made that the government takeover of AIG gave it the power to “carve up, dismember, sell or restructure” the insurer.

“It’s not the most precise language,” he said.

Bank Comparison

Boies several times sought to draw out Geithner about how the assistance and interest rates for AIG compared to banks struggling at the time, including Citigroup Inc. and Morgan Stanley.

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.”

A failure of AIG, the world’s biggest insurer, would have caused “mass panic on a global scale,” Geithner testified. Letting the company fail “would have been catastrophic for the broader economy,” he said.

An AIG failure would have been “even more damaging” than the collapse of Lehman Brothers Holdings Inc. on Sept. 15, 2008, he said.

Paulson finished his testimony on Oct. 6 hours ahead of schedule with short, direct answers such as, “You betcha.”

Geithner’s more cautious, reticent demeanor wasn’t the only contrast he offered with Paulson, 68, who was the chief executive officer of Goldman Sachs when he was appointed Treasury Secretary by Republican President George W. Bush.

‘High Regard’

The two men differed in their assessment of Greenberg, with Paulson telling Boies that he held the 89-year-old businessman in “very high regard.”

Asked by 73-year-old Boies if he shared that opinion, Geithner, 53, paused and offered a qualified response.

“I had a high regard, but I would say a complicated regard, to be honest,” Geithner said.

Geithner said he didn’t “know how to assess the quality of his judgment at the time” and declined Greenberg’s request to participate in discussions of possible federal assistance to AIG.

Geithner said regulators didn’t have a specific type of equity in mind when they began considering a rescue. Boies challenged him with documents, including a press release issued on the night the bailout began, saying the government would receive a warrant, or option to buy shares of common stock.

Geithner testified that the press release wasn’t the final word on the government’s choice of equity.

Equity ‘Evolving’

“The precise form of equity was something that was evolving,” Geithner said.

Starr claims the government switched the type of equity it sought to preferred shares when it realized it couldn’t win shareholder approval, as would be required in a deal involving common stock.

AIG fell 3.3 percent yesterday to $51.01 in trading in New York.

The case is being heard without a jury by U.S. Court of Federal Claims Judge Thomas Wheeler.

Speaking at Fortune’s Most Powerful Women Summit in Laguna Niguel, California, billionaire Warren Buffett said yesterday that he gave Geithner an appraisal of AIG just before its rescue.

Geithner asked “was there enough in the way of value there to warrant such an $85 billion loan” to AIG, Buffett said. “I thought that if they had staying power and, if there weren’t things there that I didn’t know about, it could be. Probably the underlying subsidiaries would bring $85 billion in a normalized market. And that was that.”

The case is Starr International Co. v. U.S., 11-cv-00779, U.S. Court of Federal Claims (Washington).

–With assistance from Laura Davison and Zachary Tracer in New York.

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