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Hank Paulson: AIG bailout terms were warranted

By
Kevin Dugan
Published Oct. 7, 2014, 1:07 a.m. ET

WASHINGTON — The US government imposed harsh terms for a bailout of AIG during the 2008 financial crisis in order to prevent the “moral hazard” of other companies seeking taxpayer-backed loans, former Treasury Secretary Henry “Hank” Paulson said on Monday.

Shareholders, led by former AIG chief executive officer Maurice “Hank” Greenberg, are seeking as much as $40 billion from the government in a trial here, arguing that their bailout had conditions that were too onerous, and that the firm was singled out for a government takeover.

AIG, which at the time was the largest insurer in the world, initially needed about $65 billion in loans, just as investment bank Lehman Bros. had filed for bankruptcy.

The Federal Reserve initially extended the loan at an 11 percent interest rate, which the prosecution had called “extortionate,” and took a 79.9 percent stake in the company.

“The Fed designed AIG terms that were appropriate for AIG,” Paulson said during questioning.

The government was unfair to AIG shareholders because it never demanded an equity stake from other troubled banks , the prosecution, led by attorney David Boies, claims.

The Fed demanded equity because AIG had no other good collateral, Paulson said.

That equity was made of its various insurance businesses, which were able to collect insurance payments, he said.

An AIG failure “would have hurt millions and millions of Americans,” Paulson said.

Paulson, 68, headed the Treasury for about three years until the start of 2009, including the most heated period of the financial crisis.

He came to the trial, at the US Court of Federal Claims in Washington, wearing a black suit, and spoke in his normally gravelly whisper.

He, along with former Federal Reserve Bank of New York head Timothy Geithner and the previous Fed Chairman Ben Bernanke, were the people behind some of the crisis’ most monumental decisions, including letting Lehman Bros. fail and getting JPMorgan to acquire Bear Sterns.

In the morning session, Paulson refuted claims that the US cut AIG off from Chinese investors that could have saved the company without the kinds of concessions it gave to the Federal Reserve.

Paulson said Chinese investors were “very, very nervous” about the US financial system when AIG was collapsing in September 2008.

Boies argued that the government improperly blockaded foreign investments.

Paulson’s testimony contrasted with that of Scott Alvarez, the general counsel at the Federal Reserve board of governors, who was a witness for two days last week.

While Alvarez and Boies would argue over the definition of words like “many” and “purchase,” Paulson’s testimony was almost breezy, lasting less than two hours.

By 11:30 Monday morning, the defense and prosecution were scrambling to find a witness to fill the rest of the afternoon.

Judge Thomas Wheeler gave an extended break for the court to find anyone to testify.