In 2008 American International Group (AIG) almost destroyed the global economy by issuing credit default swaps on billions of toxic mortgages. In the end, the giant insurer didn’t go bankrupt, instead, it was saved by Uncle Sam, receiving a $185 billion taxpayer bailout in the process, and is once again a thriving financial services company that focuses on insurance, not phony financial engineering.
AIG shareholders later sued the U.S. Government and taxpayers, claiming that they had been “cheated” by the Feds. AIG’s longtime former CEO and current head of hubris, Hank Greenberg, is leading the suit, claiming that the Government cheated AIG shareholders out of $40 billion when it took an 80% equity stake without “justly compensating” them.
The AIG case has reporters following it assiduously, in large part because of its star cast of witnesses. They include a former Federal Reserve Chairman, Ben Bernanke, and not one, but two former U.S. Treasury Secretaries, Hank Paulson and Timothy Geithner.
The AIG trial has revealed that the U.S. economy in 2008 was literally days away from a “doomsday” scenario. The trial has lifted the curtain on what occurred during the financial crisis and how the star players dealt with the bailouts. AIG’s position is that the federal assistance given to other financial firms such as Citigroup and Goldman Sachs was on more favorable terms than AIG’s bailout package which, according to a report in the Wall Street Journal, was “unlawful in its effort to penalize the company while other firms received more favorable aid packages.”
AIG claims that the federal government forced the insurance company to accept the rescue package’s onerous terms. On the flip side, the U.S. government claims that AIG “voluntarily accepted the deal.”
AIG’s claims border on the ridiculous. Geithner and his cohorts are portrayed like loan sharks and mobbed up Tony Soprano types who offered the loan package as a take it or leave it deal with a 14% interest rate, higher than those of other “Too Big To Fail” bank bailouts.
Geithner conceded on the witness stand that the Government “wiped out” AIG shareholders and that the tough package was required to prevent “moral hazard”, meaning that the tough terms were intended to discourage future firms from getting into such tremendous financial trouble and threatening the global economy.
Geithner echoed parts of his book, “Stress Test,” in which he revealed that an AIG failure would have been “catastrophic” for the economy and possibly “even more damaging” than Lehman’s collapse, according to a New York Times report.
Shockingly, Geithner opined that “certainly” Citigroup and Bank of America were “insolvent.”
Geithner summed up the crisis as follows, according to the Times: “It was a failure of the country to put in place a system to constrain risk-taking. Risk migrated to places where constraints did not exist.”
It gets worse. Hank Paulson testified that there were concerns that Morgan Stanley was also “insolvent” at the time.
Among the treasure troves at the trial was the revelation that the Federal Reserve had a “Doomsday Book,” which had never been made public. The tome described what would occur if these major Wall Street firms failed.
The Los Angeles Times editorial page smartly summed up the AIG trial. “Although a federal judge found the shareholders’ claims serious enough to merit a trial, it’s hard to ignore the overpowering aroma of hubris. As costly as the bailout was to shareholders, they almost certainly would have been left with nothing had AIG not been rescued. Banking analysts say AIG was doomed by the housing-backed securities and derivatives it held after the subprime mortgage meltdown, and it couldn’t have avoided bankruptcy had the government not lent it $85 billion the day after Lehman Bros.’ catastrophic collapse in September 2008.”
The LA Times concluded: “The bigger issue highlighted by the lawsuit, though, is the fact that federal officials and bank regulators were acting without a script as they scrambled to prevent financial companies from tumbling like dominoes and deepening the recession.”
As the stock market appears to be entering a period of intense volatility, let’s hope the Feds have learned from the last crisis and will know their script in the next calamity.
Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions.