U.S. Didn’t Reveal Potential Chinese AIG Rescue, Ex-CEO Testifies

By | November 6, 2014

American International Group Inc.’s former chief executive officer said regulators didn’t tell him about a potential Chinese investment before the U.S. government’s 2008 bailout of the insurer.

Robert Willumstad, testifying in Maurice “Hank” Greenberg’s lawsuit challenging the terms of the rescue, said U.S. officials discussing a loan to AIG didn’t mention that the Treasury Department knew of reports that China Investment Corp. might want to make an investment.

“Would that be something they should have told you,” David Boies, an attorney for Greenberg’s Starr International Co., asked Willumstad.

Robert Willumstad
Robert Willumstad

“Certainly could have been helpful, yes,” replied Willumstad, who was forced out as part of the $85 billion bailout loan deal.

Starr, which was AIG’s largest shareholder before the bailout, claims shareholders were cheated in the deal by the 14 percent interest paid on the loan and a requirement to surrender 80 percent of the company’s equity. The government used authority it didn’t have to demand equity and inflicted economic losses through the high interest and the structure of certain transactions, Starr alleges in its complaint, which seeks at least $25 billion.

Willumstad was questioned by Boies about a Sept. 16, 2008, e-mail between Treasury officials passing along a report from a U.S. business consultant about Chinese interest in AIG.

CIC Interest

“CIC is prepared to make a big investment in AIG,” a Treasury official wrote, “but would need Hank to call Wang Qishan,” — a reference to then-Treasury Secretary Henry Paulson and the vice premier of China at the time.

Earlier in the trial, now in its sixth week, Paulson testified that “I never talked with the Chinese that I can recall about AIG” and that he was “a hundred percent certain the Chinese weren’t going to come in and do something of the size that would save” AIG.

Boies brought up the CIC e-mail in a bid to bolster Starr’s assertion that federal regulators allowed last-minute rescue prospects to wither to force their own bailout package on AIG.

The trial is before U.S. Court of Federal Claims Judge Thomas Wheeler, who is hearing the case without a jury in Washington.

Willumstad, 69, now chairman of Adelphi University in Garden City, New York, concluded his time on the witness stand with an unflattering assessment of his successor, Edward Liddy, who had previously been chairman of Allstate Corp.

‘Didn’t Match

Willumstad said he had no idea who Liddy was and that his skills “didn’t match up well” with AIG’s needs because Allstate was a much smaller, less complicated company.

Boies has tried to show that Liddy, a former Goldman Sachs Group Inc. board member, was chosen by a cabal that was dominated by the New York-based bank and included Paulson, its former chairman and CEO.

Starr contends in its lawsuit that the government wanted equity control of AIG to facilitate a “back-door bailout” of the insurer’s counterparties, including Goldman Sachs.

Earlier in his testimony, under questioning by a government lawyer, Willumstad said the insurer’s board acted in “the best interest of all the stakeholders of AIG” when it approved the bailout.

The board voted for the loan deal after exhausting private- sector lifeline possibilities that included discussions with Warren Buffett, Jay Fishman of Travelers Cos. and J.C. Flowers & Co., Willumstad told the court. A last-minute private bank bailout led by JPMorgan Chase & Co. and Goldman Sachs also didn’t pan out, he said.

Bankruptcy Alternative

John Roberson, a Justice Department lawyer who called Willumstad to testify, asked him what AIG’s alternative was to accepting the government’s offer.

“Bankruptcy,” he replied.

The government said the deal was legal and voluntarily accepted by the board, a point Willumstad acknowledged — with a hedge.

Asked by Roberson whether the board approved the terms of the bailout “freely and voluntarily,” Willumstad responded, “I’m not sure what you mean by freely, but I’d say voluntarily, yes.”

Willumstad testified that “there’s certainly some truth” to the contention that AIG didn’t have a sure handle on its cash requirements and that it underestimated the amount of money it ultimately needed.

That was in line with the government’s argument that one reason for the harsh terms was the murkiness of the company’s finances.

Liquidity Demand

Willumstad described a series of unsuccessful efforts to raise cash after a ratings downgrade, declining asset values and other financial setbacks led to a soaring demand for liquidity.

Buffett declined to invest in AIG and said the $25 billion asking price for the company’s property and casualty business “would be too large a transaction at that time,” Willumstad said.

J.C. Flowers, J. Christopher Flowers’s leveraged-buyout firm, wanted to acquire the entire company for “a couple of dollars a share,” a proposal Willumstad said he didn’t take seriously. “Nor did the board,” he said.

A possible deal with Fishman, chairman and CEO of Travelers, to buy AIG’s personal lines of insurance businesses for $7 billion foundered because they were too financially entangled with other company properties, Willumstad said.

That left the government, which already had rebuffed Willumstad’s requests for financing similar to that provided to investment banks struggling in the financial crisis.

Paulson, Geithner

Willumstad testified that after receiving a paper copy of the government’s rescue offer on Sept. 16, 2008, he took a call from Paulson and Timothy Geithner, at the time the head of the Federal Reserve Bank of New York. He said Geithner told him the conditions delivered to AIG “were the only terms we were going to get.”

Also yesterday, Marshall Huebner, a lawyer for the New York Fed, concluded his testimony, much of it covering the legal reasoning for the structure of parts of the bailout.

Demanding that AIG provide preferred shares instead of warrants for common stock as originally contemplated allowed the New York Fed to head off de-stabilizing challenges to control of the company which might have undermined the government’s goal of calming the economy, Huebner testified.

Starr asserts that the switch was made to avoid accountability to shareholders for the onerous terms of the rescue.

AIG directors served only one-year terms and service wasn’t staggered, meaning directors were at a “relatively high risk of being fired in one shot,” Huebner said.

Preferred Shares

That made it imperative for the government to claim its controlling interest, something that could be most quickly done by getting preferred shares, which didn’t require a shareholder vote or any other action beyond board approval, he said.

“You could sculpt the preferred to what the board wants,” Huebner told the court.

Huebner also testified that the New York Fed sought to strike a balance between limiting involvement in AIG while protecting taxpayer investment in the company.

“The Fed didn’t want to have intrusive or unworkable involvement,” said Huebner, of the law firm Davis Polk & Wardwell LLP.

“‘Not controlling’ was continually a pulsating thought we kept hearing from our client,” Huebner said under questioning by Josh Gardner, a Justice Department lawyer.

Wheeler signaled his continued interest regarding the Fed’s authority to demand equity in a company during questioning of Huebner on that subject on Nov. 4.

“Whatever this witness says cannot change the language in the statute or in other legal memos that we have in evidence,” the judge said.

In a preliminary ruling in the case in 2012, Wheeler wrote that he didn’t accept the government’s position that the Fed’s emergency powers allowed it to demand stock from a company.

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

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