(Bloomberg) — A “crazily high” interest rate levied on American International Group Inc.’s $85 billion bailout loan may have been forced on the Federal Reserve Bank of New York by other regulators, according to evidence presented at a trial over the government’s taking stock of the insurer.
Timothy Geithner, the bank’s former head who is testifying in a trial accusing the government of cheating AIG shareholders, said yesterday that he was responsible for setting the rate and stuck by that statement during his second day on the witness stand.
Maurice “Hank” Greenberg’s Starr International Co., which was the insurer’s largest shareholder before the 2008 bailout, accuses the government of illegally taking equity in consideration for the loan and seeks more than $25 billion in damages. Starr’s lawyer contends AIG was charged an “extortion rate” of 14 percent interest on the loan.
Geithner was presented today with an October 2008 e-mail from a New York Fed vice president, Meg McConnell, describing a “crazily high” rate “that was forced on us (meaning FRBNY) by people that have long since punted on all the hard things that came about as a result of the decision to lend that all of us knowingly made together.”
Asked by Starr’s lawyer, David Boies, who McConnell was referring to, Geithner pointed to the Federal Reserve, then led by Chairman Ben Bernanke, or the U.S. Treasury Department.
“She must be referring to people either at the Board of Governors or Treasury,” Geithner said.
Boies concluded his questioning of Geithner without asking further questions to reconcile any discrepancy as to who was responsible for setting the rate for the initial AIG bailout on Sept. 16, 2008. The government lowered the rate weeks later.
Responding to questions later from a Justice Department lawyer, Geithner said it wasn’t clear to him whether the New York Fed could help AIG until about the time of the Sept. 15, 2008, collapse of Lehman Brothers Holdings Inc.
Geithner said he discussed the “core conditions” for the AIG bailout with Bernanke and Donald Kohn, then the Fed’s vice chairman. He said the rate wasn’t forced on the New York Fed and repeated his earlier testimony that he was ultimately responsible for setting it.
He said the higher rate was to protect the government for its risk in providing the loan and to avoid “moral hazard” by making the terms “tough enough that they were not viewed as attractive.”
Earlier today, Geithner testified that “the scale of AIG’s financial needs, the potential losses relative to those facing other firms at the time, were a result, by definition, substantially of the management decisions by the company.” Greenberg was AIG’s chief executive officer until 2005.
When asked by Boies about whether any detailed analysis had been done to determine the causes of AIG’s financial problems, Geithner said he was “not sure you could analyze the extent to which that might be the case.”
After Boies introduced a draft article by Geithner stating that the government forced losses on AIGshareholders proportional to the mistakes of the firm, he asked him whether other companies needing government assistance, such as Morgan Stanley, were similarly punished.
Geithner said they were. He said requiring Morgan Stanley and other banks to raise more common equity relative to their capital needs was punishment proportional to the penalties imposed on AIG.
Geithner’s testimony so far has been marked by careful answers and a lack of recollection about the details of the financial rescue he helped oversee. Bernanke, the former chairman of the Federal Reserve who had been set to begin his testimony today, is now scheduled to testify tomorrow.
Yesterday, Geithner backed away from two of his more provocative assessments of AIG’s 2008 bailout and shed little new light on how he set the interest rate for AIG’s rescue loan.