Former Treasury Secretaries Head To Court For AIG Lawsuit

Oct 6, 2014
Originally published on October 6, 2014 6:30 pm
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ROBERT SIEGEL, HOST:

Six years ago anxiety gripped the nation. The global financial system was cracking. One Wall Street bank had collapsed, another had to be rescued. The giant insurance firm AIG had been bailed out, too. Well, today AIG is a stable, profitable company and the government has sold its stake, but the firm's largest shareholder back in 2008 isn't happy. He is suing for $40 billion.

NPR's John Ydstie was in the Washington federal courtroom today where this lawsuit was being heard. And John, first of all, this is a suit brought by Hank Greenberg. AIG was about to collapse and the government ultimately spent almost $200 billion bailing it out.

What's he complaining about?

JOHN YDSTIE, BYLINE: Well, Greenberg argues that AIG shareholders were treated worse than shareholders in other institutions that got bailouts. First in exchange for its initial $85 billion loan to AIG, the government took a nearly 80 percent stake in the company and it required AIG to pay 12 percent interest on the loan, which one U.S. official called kind of loan-sharky. Then, as you'll recall the government ordered AIG to make good on the insurance it had sold to Wall Street banks, in the form of credit default swaps - insurance that protected the banks from losses on their risky mortgage-backed securities.

SIEGEL: So the Wall Street banks who bought those risky mortgages were made whole while AIG and Hank Greenberg - the big stockholder and the rest of the shareholders - were losing billions, they say.

YDSTIE: That's right and Greenberg's lawyer, David Boies, began to focus on that difference in treatment today. He had Hank Paulson, one of the architects of the bailout, the former Treasury Secretary, in the hot seat on the witness stand. And first Boies noted that Paulson himself had called the AIG deal punitive. Paulson said, yes, he'd said that, but he said it was not to be vindictive. He said it's just the way the system is supposed to work. Paulson said it's important to avoid moral hazard - that is, to make sure people who buy stock in a big company like AIG don't assume the government will be there to bail them out if things go bad.

SIEGEL: But if that's the reason for punitive treatment of AIG shareholders, why not treat the shareholders of the Wall Street banks - Goldman Sachs, Citigroup - the same way, make them bear some losses too?

YDSTIE: Well, Boies essentially asked that very question and Paulson said, because forcing these already wobbly Wall Street banks to pay could've pushed them into bankruptcy one after another. And Paulson said it was more important to bring stability to this system than to punish their shareholders.

SIEGEL: And there have been accusations that Paulson, who was a former chairman of Goldman Sachs, was protecting Goldman and his other friends on Wall Street. Did David Boies question him about that today?

YDSTIE: Well not directly, but there were several instances where Boies made a point of noting, that for instance, the guy Paulson who asked to find a new CEO for AIG was a Goldman alum and the eventual CEO, Ed Liddy was too.

So we may get more of that later on in the trial. Tomorrow we're going to hear from former Treasury Secretary Tim Geithner and then later this week from former Fed Chair Ben Bernanke.

SIEGEL: That's quite a list of witnesses. What's the betting on whether the Greenberg suit will be successful?

YDSTIE: Well, most legal experts say they don't think so and the government's basic argument that AIG would've gone bankrupt and shareholders would've lost everything if the government hadn't stepped in is pretty compelling. As one government lawyer put it, we gave them a lifeboat and now they're complaining it's not comfortable enough?

SIEGEL: That's NPR's John Ydstie.

Thank you, John.

YDSTIE: You're welcome, Robert. Transcript provided by NPR, Copyright NPR.