AIG Bailout Trial Reopens Scrutiny of Government Bailouts

October 13th, 2014

Former AIG CEO Hank Greenberg is suing the United States (US) government for $40 billion, arguing the terms of AIG’s 2008 bailout were too harsh. The trial is underway, and last week former Federal Reserve and Treasury officials including, Ben Bernanke, Tim Geithner, and Henry Paulson, testified. Their testimony made headlines for providing a rare glimpse into the high-stakes, backroom bailout negotiations that took place at the onset of the financial crisis.

The AIG bailout left the company with a 14 percent interest rate on its loan, while the government acquired a 79.9 percent stake in the company. Later on, the big bank bailouts (Goldman, Citi, JPMorgan) saw far more generous terms than what the Federal Reserve offered AIG.

In the current dispute, Mr. Greenberg’s attorney David Boies has argued that the Federal Reserve forced AIG into uniquely onerous terms to the extreme disadvantage of shareholders. During their testimony, both Bernanke and Geithner indicated the harsh terms on the AIG loan were designed to avert increased risk of future moral hazard among similar companies.

The testimony makes clear that in 2008 the Federal Reserve was wading into new and unfamiliar waters by providing a massive loan and acquiring such a large stake in an insurance company. While few commentators expect Mr. Greenberg to prevail, the suit opens the door for future disputes over the government’s actions during the financial crisis.

 

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