By Damian Paletta And Leslie Scism
WASHINGTON--Former Federal Reserve Chairman Ben S. Bernanke
became more animated in federal court on Friday, pushing back
against assertions that the government's 2008 rescue of American
International Group Inc. was designed to punish the company and
describing at length the central bank's role in combating a
crisis.
On his second day of testimony in federal court, Mr. Bernanke
maintained that officials sought to save AIG, not punish it. "The
company was on the brink of default, and our intervention would
spare it the discipline of the market," he said.
The testimony is part of a trial of a class-action lawsuit filed
in 2011 by Starr International Co., which is headed by AIG's former
and longtime Chief Executive Maurice R. "Hank" Greenberg. The
lawsuit contends that the government went beyond its authority in
the rescue package, by taking a 79.9% ownership stake in AIG and
imposing what it calls an "extortion" interest rate. Starr was
AIG's largest shareholder in 2008.
Mr. Bernanke, now a fellow at the Brookings Institution, during
most of the morning session continued with his pattern from
Thursday of giving mostly one- and two-word answers to plaintiff's
attorney David Boies's questions.
Mr. Bernanke perked up noticeably when Mr. Boies ended his first
round of questioning and turned the dais over to Kenneth Dintzer,
the Justice Department's lead attorney. The former Fed chairman
leaned forward, spoke into the microphone, smiled on occasion, and
gave much longer, explanatory answers to questions.
At one point, when discussing the causes of the financial
crisis, Mr. Bernanke gave a response so voluble that the court
reporter had to ask him to slow down. Mr. Bernanke paused, then
said, "I don't know if I can."
The courtroom erupted in laughter and even the judge cracked a
smile.
Mr. Dintzer walked Mr. Bernanke through the history of the
Federal Reserve, and its role as "lender of last resort." The
questioning was seemingly designed to show how the central bank
contained emergency lending powers for decades that had never been
used until the financial crisis.
Mr. Bernanke, former chairman of the Princeton University
economics department, was in full-professor mode at this point,
speaking about Bagehot's Dictum and 19th-century views on central
banking to explain why economists had long believed that the
central bank should be able to make emergency loans. The Fed's
legal authority to make these emergency loans is known as Section
13(3), referencing the part of U.S. law that makes them legal.
Mr. Bernanke said many companies, including AIG, wanted the Fed
to give them 13(3) loans during the financial crisis, but the Fed
often rejected the idea. He said, for example, that major auto
companies wanted the Fed to make them these loans during the
crisis, but the Fed found it to be outside their purview. "Our
focus was on the financial system," he said.
Mr. Bernanke said "moral hazard" was a chief concern for many
Fed officials during the financial crisis for at least two reasons.
He said he thought any bailout, which is how he described the AIG
assistance, would signal to other firms that excessively risky
behavior would receive a federal backstop. And he said firms would
also stop trying to seek private financing if they felt the
government would always step in.
"We very, very much did not want to make a loan of the sort" to
AIG, Mr. Bernanke said.
Mr. Bernanke was expected to continue his testimony after a
lunch break.
The rescue came on Sept. 16, 2008, amid concerns that AIG's
failure would cause widespread damage to an already rapidly
deteriorating economy.
The $85 billion emergency loan extended by the Federal Reserve
Bank of New York averted a bankruptcy filing by the giant
financial-services company, after an 11th-hour private-sector
effort to raise $70 billion or so was unsuccessful, court testimony
and filings have shown.
Starr's lawsuit suit also alleges that the government unlawfully
sought to punish AIG, without analysis or investigation to
understand the financial-services company's role in the crisis
compared with other financial companies.
Mr. Bernanke's testimony on the 10th day of the trial followed
that of Timothy Geithner, president of the New York Fed when AIG
nearly collapsed, and before him, former U.S. Treasury Secretary
Henry Paulson. After more than two days, Mr. Geithner wrapped up
his testimony just before Mr. Bernanke took the stand Thursday.
As Mr. Boies, who is representing Starr, repeatedly pushed Mr.
Bernanke about aspects of the rescue, the former Fed chairman
responded: "You are asking me about legal details of the agreement
that I simply do not know."
Also on Friday morning, Judge Thomas Wheeler admonished Mr.
Boies on two occasions to move more quickly after days of
methodically walking the former government officials through
documents that were already in the public record.
"I understand the court's desire, and I will move on," Mr. Boies
said.
AIG, whose primary business is selling insurance, nearly toppled
as a result of its sale of an unregulated type of insurance that
protected banks and other large clients against losses on complex
mortgage bonds.
The suit seeks $40 billion for shareholders.
The AIG rescue package swelled to $184.6 billion in government
assistance and taxpayers' stake peaked at 92%. AIG fully repaid the
assistance by late 2012, and the government has calculated it
received a positive return of about $23 billion.
Write to Damian Paletta at damian.paletta@wsj.com and Leslie
Scism at leslie.scism@wsj.com
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