US imposed ‘extortionate’ interest rate on AIG: Greenberg
Six years after the government bailed out AIG, $40 billion of taxpayer money can come down to one word: equity.
In an overflowing courtroom Monday, AIG’s largest shareholders launched a broadside attack against the US government as it started a painstakingly detailed, six-week trial questioning the decisions by a troika of federal credit guardians — former Treasury Secretary Henry Paulson, then former Federal Reserve Bank of New York chief Tim Geithner, and ex-Federal Reserve Chairman Ben Bernanke — during the 2008 credit crisis.
The shareholders, led by former AIG CEO Maurice “Hank” Greenberg, allege that the Fed singled out the insurance giant by taking a controlling share of its equity and imposing “extortionate,” double-digit interest rates on its $162 billion public bailout.
The government denies these claims, saying that AIG was never entitled to a bailout and it treated the shareholders fairly.
The courtroom was packed in the morning, with observers shuttled to two other empty rooms where the proceeding was broadcast on televisions.
The lawsuit was brought by Starr International, an insurance company headed by Greenberg. AIG’s current management isn’t part of the suit.
Greenberg’s company doesn’t deny that AIG needed the bailout — just that the draconian terms imposed on the insurer violated the boundaries of legal statutes and were unfair compared to banks that got lower-interest rate government loans.
“There is simply no authority in the statute to give the Federal Reserve the roving permission to try to find people that they want to penalize and then use its lending authority to extract those kinds of penalties,” said David Boies, the lawyer representing the shareholders.
The government argues that it could just as easily have let AIG fail, like the 104,383 other bankruptcies in 2008, Kenneth Dintzer, the attorney for the government, said.
“The goal was not to save AIG,” he said. “The goal was to save the world from AIG.”
The word Boies focused on most in his opening remarks was “equity”— as in ownership of AIG and how the government got it.
Boies argued that the Fed improperly went around shareholders by structuring a deal that gave the government stock with voting rights, instead of warrants, which don’t.
The government had rejected this argument as a “conspiracy theory.”
The company, which in 2008 was the largest insurer in the world, collapsed because it put too much money on the wrong end of derivatives betting on subprime mortgages. The company has since bounced back and the government no longer owns a stake.