In his second day on the witness stand, Ben S Bernanke, the former Federal Reserve chairman, recounted his extreme reluctance to lend money to the American International Group in the summer of 2008, even as financial markets were weakening.
"We very, very much did not want to make a loan of this sort," Bernanke said. He added that assisting an insurance company like AIG could give an incentive to other nonbank companies to look to the Fed for help instead of the private sector.
"We didn't want to be in a situation where every company in America would call us up and ask for a loan," he said.
Even as late as September 14, 2008, as Lehman Brothers prepared to announce its bankruptcy, Bernanke said, he remained sceptical of extending a lifeline to the insurance giant. The company's health was deteriorating rapidly, and he said he doubted that AIG's management even grasped the extent of the company's problems, let alone had a viable plan to deal with them. At the same time, he said, the amount of money the company needed kept rising.
"The number kept increasing over the weekend, which made me concerned about how much they understood their own situation, and what steps they were taking to solve the problem," Bernanke said.
His testimony came after that of two other crucial players in the financial crisis, former Treasury Secretary Henry M Paulson Jr and Timothy F Geithner, who was president of the New York Fed in 2008.
Maurice R Greenberg, AIG's former chief executive, is suing the government, claiming that the terms of AIG's bailout were too onerous and that he and other shareholders should receive $40 billion in compensation.
To prove that, Greenberg's legal team, led by David Boies, will have to show that the government did not have the legal authority to demand an initial 79.9 per cent equity stake in AIG, and that a combined 14 per cent interest rate for the government's bailout loan was excessive.
This week, however, the three principal architects of the bailout have said that they believed that the actions had been legal. They could not recall, however, or did not know details of how the terms of the deal had been reached. Instead, it fell to the Fed's lawyers, including Thomas Baxter, who testified last week, to set up the structure of the A.I.G. loan deal.
Mr. Greenberg's legal team contends that the email correspondence and other documents introduced from 2008 tell a different story, and that witnesses set to testify in the coming weeks from both inside and outside the government (among them, financial consultants brought in during the crisis) will show closer involvement by the three principals, in particular Mr. Geithner.
By contrast, the government believes that this was a powerful week for its side of the case, and that it showed that everything involving the A.I.G. bailout was by the book, even though the situation was unprecedented.
The government lawyers believe that Mr. Bernanke did surprising well, speaking almost as a professor to explain different uses of the Federal Reserve Act to the judge, Thomas Wheeler.
The trial is expected to last another month, and one of the last witnesses is likely to be Mr. Greenberg.
Lehman's failure rocked the world's financial markets on Monday, Sept. 15, 2008, cascading through nearly every facet of Wall Street's storied banks and investment houses. When a Fed governor, Kevin Warsh, relayed information to Mr. Bernanke from Goldman Sachs that the "capital hole" at A.I.G. was worse than expected - "too big to be filled" - Mr. Bernanke said he realized he might have to re-evaluate his opposition to an A.I.G. bailout.
Officials at the New York Federal Reserve Bank had begun putting together a potential plan to save the insurance giant, and they were set to present the idea to the Fed's Board of Governors the next day. The board's vote would have to be unanimous, he said, since the Federal Reserve Act requires five votes in favor of an emergency loan and there were only five sitting Fed governors at the time.
But that Monday afternoon, Mr. Bernanke said, he received a memo prepared by the Federal Reserve staff on an A.I.G. loan. Their conclusion, he said, was not to do it.
Mr. Bernanke said that he felt the memo "was a bit dated" since the situation had deteriorated. He testified that he told his staff that they could present their findings to the Board of Governors but "not to present a conclusion."
The next day, when the board met, the members voted to approve an $85 billion loan to A.I.G.
©2014 The New York Times News Service
