The highly anticipated Court of Federal Claims case, Starr International Co v. U.S., No. 11-00779 heated up as former Fed chair Ben Bernanke defended the government’s 2008 bailout of American International Group (
AIG).
Bernanke’s remarks yesterday marked the fourth straight day of testimony from the government officials involved in the saga looking to convince the federal judge that the rescue of the insurance company was legal.
Yesterday afternoon was also significant due to the fact that Bernanke’s testimony aimed to distinguish between the $85 billion loan package extended to AIG, at an interest rate upwards of 12 percent (approximately an 80 percent stake in the company), and the loans the government provided to banks at the summit of the Great Recession through the New York Federal Reserves’ broad lending facilities.
Bernanke admitted that while the officials designed the AIG rescue to ‘minimize windfall’ for shareholders, they considered other factors when designing other loans, such as the need for monetary stimulus to stabilize the system as well as avoiding any stigmas associated with taking advantage of the loans.
The entire basis for this case came from former AIG CEO Hank Greenberg, also the company’s largest shareholder, who sued the government in 2011 over the terms of the bailout by arguing it resulted in an illegal takeover of the company from the AIG shareholders.
Conversely, the defense has maintained that the bailout, above all, raised the value of AIG shares and the policymakers had to consider ‘moral hazard’ concerns when calculating the terms.
When asked on Thursday by Greenberg's lawyer, David Boies, if officials had concluded that AIG's collapse could have catastrophic consequences for the broader financial system, Bernanke responded: "We were very concerned about that possibility, yes."
Earlier on Thursday, former U.S. Treasury Secretary Timothy Geithner wrapped up two and one-half days on the stand, sparring with Boies over whether the loan posed substantial risks to the government.
Boies has sought to portray the New York Federal Reserve bank, which Geithner led at the time, as making AIG a low-risk loan with undeservedly high terms.
AIG finished repaying the full $182.3 billion bailout in December 2012, leaving taxpayers with a nearly $23 billion profit.
