Former AIG CEO Timothy Geithner grilled in court over firm’s bailout

By Marcy Gordon, AP

WASHINGTON–Timothy Geithner, a key player in the U.S. government’s 2008 bailout of American International Group Inc. (AIG), 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.

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 US$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 US$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 also scheduled to testify later in the week.

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 the 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.