October 8, 2014 / 5:39 PM / in 3 years

Geithner: NY Fed unsure until last minute about AIG loan

WASHINGTON (Reuters) - Former U.S. Treasury Secretary Timothy Geithner defended the 2008 bailout of American International Group Inc (AIG.N) for a second day on Wednesday, struggling at times to respond to increasingly contentious questions about the government’s efforts to rescue the insurance company as it stood minutes from bankruptcy.

A new sign is displayed over the entrance to the AIG headquarters offices in New York's financial district, January 9, 2013. REUTERS/Brendan McDermid

The questions came in the second week of trial in 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 in September 2008, which was extended in exchange for a nearly 80 percent stake in the company, cheated its shareholders.

A U.S. Justice Department lawyer on Wednesday afternoon elicited testimony from Geithner that the New York Fed did not determine until the last minute that it had the authority to provide AIG a loan that could be fully secured.

We were “trying to do something we didn’t normally do,” he said.

Geithner described how he believed the terms of the loan, which included a high interest rate, were necessarily harsh and tougher than potential private terms, so that they could not be viewed as attractive to other institutions facing similar circumstances.

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.

In the trial’s morning session, a lawyer for Greenberg, David Boies, pressed Geithner with questions about the extent of the government’s control of the company and whether his team at the New York Fed had assessed whether AIG had taken imprudent risks.

The questions came after Geithner, who served as president of the New York Fed at the time of the rescue, spent Tuesday describing the bailout as necessary to avert a second Great Depression.

The Wednesday morning questioning of Geithner grew so heated that at one point when Geithner asked if he could clarify one point, Boies told him he could but that it would likely generate more questions. Geithner responded: “let’s not, then.”

Boies has sought to portray the government as punishing AIG shareholders through the loan terms without providing any basis for how it arrived at the punishment. Government officials have in part been hamstrung by years of public statements about the bailout, some of which contradict each other.

On Wednesday Geithner was confronted with emails and other documents in which he described the government as taking on extraordinary, unprecedented risks with its loans to AIG, and interviews in which he said the loan was relatively low risk.

Boies also introduced transcripts, essay drafts and emails in which Geithner seemed to suggest the government had forced losses on AIG shareholders “proportionate to the mistakes of the firm” but that the government had not undertaken any specific analysis to determine what exactly those mistakes were.

Geithner defended himself by saying the government had forced losses on the shareholders of other financial institutions but that AIG was unique in the scale of the problems it faced relative to rival insurance companies and other financial institutions.

He also said that while his team undertook extensive efforts to assess the scale of the losses and liquidity issues that AIG faced in September 2008, they could not go back and assess the exact impact of each decision management had made that may have contributed to the losses.

“There’s that thing about hindsight and stuff,” Geithner said, to laughter in the courtroom.

The lawsuit, which is being tried in the Court of Federal Claims in Washington, won class action status in May 2013.

Reporting by Aruna Viswanatha; Editing by Steve Orlofsky

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