By Damian Paletta And Leslie Scism
WASHINGTON--Former Federal Reserve Chairman Ben Bernanke took
the offensive in federal court, as he wrapped up a week that peeled
back the curtain on the chaos that consumed Washington and Wall
Street in the fall of 2008 during the throes of the financial
crisis.
Mr. Bernanke's testimony followed that of two other former top
regulators, Timothy Geithner and Henry Paulson, who also defended
the terms of the bailout of faltering insurer American
International Group Inc. The class-action lawsuit was brought by
former AIG Chief Executive Maurice R. "Hank" Greenberg on behalf of
his investment firm and other shareholders.
Toward the end of his second and last day of testimony on
Friday, Mr. Bernanke tried to put in focus what might have happened
to AIG's shareholders if the central bank hadn't agreed to give the
company an emergency loan.
Mr. Bernanke said AIG was "certainly not" entitled to receiving
such a loan and could easily have faced the same fate as Lehman
Brothers Holdings Inc.
"And what happened to Lehman?" Justice Department attorney
Kenneth Dintzer asked.
"It collapsed," Mr. Bernanke said in a stoic, stern voice that
pervaded his tense testimony over two days.
Mr. Greenberg's suit, filed in 2011 by his investment and
charitable firm Starr International Co., contends the government
went beyond its authority in the rescue package, by taking a 79.9%
ownership stake in AIG and imposing what it called an "extortion"
interest rate. Starr was AIG's largest shareholder in 2008.
Earlier in the week, Messrs. Paulson and Geithner, both former
Treasury secretaries, gave their accounts of the AIG bailout.
Mr. Paulson spoke reflectively but crisply, leaning back in his
chair with his fingertips pressed together, calling the AIG deal
terms justifiably "harsh."
Mr. Geithner, over three days, oscillated from joking to sober
recounts about how the "world was falling apart."
Mr. Bernanke had two different moods when answering questions
from Starr's lawyer, David Boies, annoyed and really annoyed.
With the trial now moving into its third week, the arguments for
the plaintiffs and the Justice Department are crystallizing. Mr.
Boies is trying to paint a picture of a federal government that
offered favorable bailouts to companies like Citigroup Inc., Morgan
Stanley and Goldman Sachs Group Inc., while deciding to make an
unfair example out of AIG.
The Justice Department is trying to stockpile evidence that
shows AIG was a reckless behemoth careening toward collapse that
could have taken the financial system down with it, and that its
shareholders got substantial benefit out of the rescue package. The
government also argues that shareholders at the other firms
likewise absorbed pain in the form of mandated capital raises.
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 certain
mortgage bonds.
Messrs. Bernanke and Geithner both spoke of the importance of
"moral hazard" when determining the loan terms for AIG, saying that
the loan had to be seen as unattractive to deter other companies
from seeking similar assistance.
Mr. Bernanke, long known for being professorial and perhaps a
tad deferential, exuded disdain from the minute he sat in the
witness chair Thursday afternoon.
By late Friday, he referred to one of Mr. Boies's questions as
"silly" and another as "irrelevant." Even Judge Thomas C. Wheeler,
who is presiding in the case, seemed to sympathize with some of Mr.
Bernanke's frustration, twice ordering Mr. Boies to move along to a
new line of questioning.
Mr. Bernanke on multiple occasions took shots at AIG's
management and risk-taking, even saying the government's bailout of
the company led to a public and political backlash against the
central bank with lasting consequences. He said Congress's decision
to create a Financial Stability Oversight Council, which peeled
power away from the Federal Reserve, "was basically a political
outcome in my view dictated by anger at the Fed."
He also said the AIG bailout "poisoned public support" for the
$700 billion Troubled Asset Relief Program that Mr. Bernanke and
Bush administration officials in 2008 thought was necessary to stem
the financial panic.
The AIG rescue package swelled to $184.6 billion in government
assistance, and the taxpayers' stake peaked at 92%. AIG fully
repaid the assistance by late 2012, and the government has
calculated it received a 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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