WASHINGTON: Former US Treasury Secretary Timothy Geithner testified Tuesday that if insurer AIG had been allowed to fail in 2008, the impact would have been an economic catastrophe.
On the witness stand on the second day of the $40 billion lawsuit over the government's seizure of American International Group, Geithner said financial regulators were trying to avoid some of the mistakes made in the 1930s collapse.
He stressed that much of what they did in the face of a snowballing financial crisis six years ago was beyond any disaster planning by the Federal Reserve, including the scenarios mapped out in a Fed's "Doomsday Book."
"The Great Depression was an example of the terrible failures in crisis response," and the Fed was trying to be more effective.
"So much of what we were doing was not in the book," he said. "We were really outside the boundaries of precedent."
Asked by David Boies, who represents former AIG chairman Hank Greenberg in the suit against the government, if AIG's collapse would have had catastrophic results, Geithner agreed.
Greenberg, suing via his Starr International Company, the largest single shareholder in AIG at the time, argues that the government illegally took a 79.9 percent shareholding in the company in exchange for an $85 billion injection of capital and tens of billions more in high-priced loans.
Greenberg said the company, the world's largest insurer, was simply in need of funding as the financial system was locking up in September 2008.
By taking over the company, the government wiped out much of the value of existing shareholders' equity.
But the government argues that in saving the company, at least shareholders salvaged some value.
Geithner at the time was head of the New York branch of the Federal Reserve, which supervised the biggest banks and the financial system generally.
Boies quizzed him on the details of the takeover and whether AIG was insolvent or just illiquid.
He also began to make a case centered around the amount the Federal Reserve charged AIG for support, compared to what possible private sector lenders might have charged for funding, and what the Fed charged other banks like Citigroup for tens of billions of dollars in liquidity support.
At one point he showed a document from the Fed that noted that, if managed well, an AIG under the arm of the government could make money and generate a good return for the government's investment.
Together it suggested Boies would seek to show the government motivated by profit in grabbing AIG.
On the first day of the trial, Hank Paulson, the Treasury Secretary at the time of the takeover, admitted the US set more onerous conditions for supporting AIG than it had for other companies.
If AIG had failed, he said, "it would have taken down the financial system and hurt millions of Americans."
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