Tags: tim geithner | aig | financial crisis | economy

Geithner Blames AIG Management Decisions for 2008 Financial Woes

Wednesday, 08 October 2014 02:18 PM

Timothy Geithner blamed American International Group Inc.’s management for the insurer’s financial woes in 2008 as he continued the second day of testimony about the government’s bailout of the company.

Geithner, the head of the Federal Reserve Bank of New York at the time of the bailout, is testifying in Maurice “Hank” Greenberg’s Starr International Co. lawsuit that the government cheated AIG shareholders by illegally taking equity as consideration of an $85 billion loan. Starr is seeking more than $25 billion in damages.

“The scale of AIG’s financial needs, the potential losses relative to those facing other firms at the time, were a result by definition substantially of the management decisions by the company,” Geithner said under questioning by David Boies, a lawyer for Starr, in Washington federal court.

When asked by Boies about whether any detailed analysis had been done to determine the causes of AIG’s financial problems, Geithner said he was “not sure you could analyze the extent to which that might be the case.”

Geithner’s testimony so far has been marked by careful answers and a lack of recollection about the details of the financial rescue he helped oversee. Ben Bernanke, the former chairman of the Federal Reserve who had been set to begin his testimony today, is now scheduled to testify tomorrow.

Yesterday, Geithner backed away from two of his more provocative assessments of AIG’s 2008 bailout and shed little new light on how he set the interest rate for AIG’s rescue loan, a key question Starr’s lawsuit.

Extortion Rate

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

Responding to Boies’s questions yesterday, 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.

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.

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.

Biggest Shareholder

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.

Backtracked Somewhat

“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.

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.

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.”

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Timothy Geithner blamed American International Group Inc.'s management for the insurer's financial woes in 2008 as he continued the second day of testimony about the government's bailout of the company.Geithner, the head of the Federal Reserve Bank of New York at the time...
tim geithner, aig, financial crisis, economy
Wednesday, 08 October 2014 02:18 PM
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