Ex-U.S. Treasury Secretary Geithner defends AIG bailout

Tue Oct 7, 2014 6:41pm EDT
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By Aruna Viswanatha

WASHINGTON (Reuters) - Former U.S. Treasury Secretary Timothy Geithner on Tuesday defended the government's rescue of American International Group Inc (AIG.N: Quote) in September 2008, saying it was necessary to prevent the country from plunging into a second Great Depression.

Geithner's comments came in testimony in the trial of a lawsuit brought by Hank Greenberg, a major AIG shareholder until the bailout and the company's chief executive until 2005. He contends the terms of the government $85 billion loan to AIG cheated its shareholders.

While few legal experts expect Greenberg's lawsuit to be successful, it has served to reopen a fraught chapter in American economic history and the outcome could shape how regulators respond to future crises.

Greenberg's lawyer, star litigator David Boies, spent much of Tuesday morning introducing emails Geithner wrote and received that discussed AIG's deteriorating condition when he served as president of the New York Federal Reserve in the chaotic days around the initial bailout offer.

Many of the emails were sent by other New York Fed officials after midnight, underscoring the round-the-clock effort the government undertook to contain the 2008 financial crisis.

Boies has sought to portray the government as making ad hoc decisions that unfairly punished AIG and is arguing that the terms the New York Fed required as part of the bailout, including a nearly 80 percent stake in the company, were illegal.

Later on Tuesday, Geithner later testified that some of the terms, including the high interest rate, were in part based on a proposal from JPMorgan Chase & Co (JPM.N: Quote) and Goldman Sachs Group Inc (GS.N: Quote), but he said he could not remember analyzing the basis for the interest rate. The proposal came from a term sheet for a possible private sector rescue, but that rescue never materialized.

The exchange grew testier as the afternoon wore on, as Boies tried to push Geithner to say the Fed had worked to avoid an AIG shareholder vote in connection with the rescue, or that regulators had failed to follow up on legitimate private sector efforts to help AIG. Geithner responded that he did not know about efforts related to shareholder votes and that he would have seriously considered any realistic proposals from private investors.   Continued...

Former Treasury Secretary Timothy Geithner speaks during a Thomson Reuters Newsmaker event in the Manhattan borough of New York, May 23, 2014. REUTERS/Keith Bedford