AIG Had No Better Offer, Bernanke Testifies In Trial
October 10, 2014 by Aaron M. Kessler
Ben S. Bernanke, a former chairman of the Federal Reserve, was not the most cheerful of witnesses on Thursday as he took the stand in the lawsuit over terms of the 2008 bailout of the insurance giantAmerican International Group.
Mr. Bernanke gave terse and clipped responses to questions, many times just a ”yes, sir” or ”no, sir.” He affirmed that the global financial system had been on the verge of collapse inSeptember 2008. He agreed that A.I.G.’s collapse would have been ”basically the end” of the financial system, so connected was it to other parts of the financial world.
ButMr. Bernanke did not agree with the notion — a central part of the lawsuit — that A.I.G. got a raw deal from the Federal Reserve, or that it could have gotten a better deal elsewhere.
”It was evident from the fact that the board took the Fed’s offer that they didn’t have a better offer,” he said, referring to the vote by A.I.G.’s board approving the government’s loan, and its terms.
Maurice R. Greenberg, A.I.G.’s former chief executive, is suing the government, claiming the terms of the 2008 bailout, which started at$85 billion and grew to$185 billion, were too harsh. The suit seeks$40 billion in compensation for A.I.G.’s shareholders, and claims that the government overstepped its authority in demanding an initial 79.9 percent equity stake and combined 14 percent interest rate in return for its bailout loan inSeptember 2008.
The government has responded by calling A.I.G. shareholders ungrateful for the billions in taxpayer money used to rescue their firm when no one else would, saying that the Fed’s intervention was legal and appropriate.
Mr. Bernanke’s testimony came a day after emails from him were introduced in court. Writing under the pseudonym ”Edward Quince,” he indicated his frustration with A.I.G. ”acting like an investment bank,” and said he believed that an open-ended loan to the firm amounted to a ”bridge to nowhere.”
If he had been hoping to get his day in court over with quickly, he did not get his wish, unlike a former Treasury secretary,Henry M. Paulson Jr., who was on the stand less than two hours on Monday. On Thursday, testimony by another former Treasury secretary,Timothy F. Geithner, continued longer than expected, until nearly noon.Mr. Bernanke was left to bide his time in a side room.
Just before he was called into the courtroom, the former Fed chairman emerged from the side room and paced back and forth in the fifth-floor hallway at theFederal Court of Claims.
Despite persistent questions from Mr. Greenberg’s lawyer, David Boies, Mr. Bernanke either did not recall, or was not particularly knowledgeable about, the specifics of how A.I.G.’s bailout terms came together in September 2008. Instead, he said, he largely followed the lead of the New York Federal Reserve Bank and its president at the time, Mr. Geithner.
When asked whether he knew the basis for the interest rate A.I.G. was being charged before theSept. 16, 2008, vote by the Fed’s board of governors,Mr. Bernanke said he did not. WhenMr. Boies asked whether he knew if A.I.G.’s loan was fully secured, he responded that it was, ”to the satisfaction of the Federal Reserve Bank ofNew York.”
Even onSept. 17 of that year, when the Fed had already begun extending money to A.I.G., but before the ultimate deal structure was completed,Mr. Bernanke said he was not aware of whether the agreement would call for a voting equity stake.
”I assumed that the agreement would be a binding agreement, but I left the details to the legal team,” he said.
Asked when he first found out that the deal would involve a controlling equity stake,Mr. Bernanke said he did not remember.
But he did remember that A.I.G.’s state of affairs was dire, even after the first$85 billion loan was made available. Only several weeks later,Mr. Bernanke said, the insurance giant was almost bankrupt again, and needed not just a restructured Federal Reserve loan but also an infusion of capital from the newly approved Troubled Asset Relief Program, or TARP.
”I think the company did worse than I anticipated,” he said.
Also discussed in court on Thursday was the Fed’s secretive ”Doomsday Book,” which supposedly catalogs the special emergency powers of the central bank, dating back to the Great Depression. The Fed wants desperately to keep the book out of public view, and on Thursday, JudgeThomas C. Wheeler heard brief arguments from both sides on whether the two versions of the book that sit in evidence should remain under seal.
It was uncertain whenJudge Wheeler would rule on the issue, but he made clear on Thursday that the Doomsday Book could indeed potentially hold important information for the case — considering thatMr. Greenberg’s suit largely rests on whether the Fed had the authority to engage in practices like taking an equity stake, as it did with A.I.G.
”I think all of that is relevant to the case, and I don’t care if they go back to the 1930s or not,” the judge said.
Mr. Bernanke, who stepped down in January as chairman of the Federal Reserve, and was succeeded byJanet L. Yellen, was scheduled to take the stand again Friday. Lawyers said he was likely to be questioned for the entire day. It remains unknown what Fed email pseudonymMs. Yellen may have chosen for herself.
Geithner Testifies That Government Had Right to Act to Avert A.I.G. Bankruptcy A.I.G. Bailout, Revisionists’ Version
This is a more complete version of the story than the one that appeared in print.