(Bloomberg) – American International Group Inc.’s bailout by the U.S. in 2008 was seen by the company’s board as its only rescue option at the time, former Chief Executive Officer Robert Willumstad testified.
The insurer’s board acted in “the best interest of all the stakeholders of AIG” when it approved an $85 billion loan requiring it to surrender 80 percent of AIG’s equity and pay a 14 percent interest rate, Willumstad said in the trial of Maurice “Hank” Greenberg’s lawsuit challenging the rescue.
The board voted for the loan deal after exhausting private- sector lifeline possibilities that included discussions with Warren Buffett, Jay Fishman of Travelers Cos. and J.C. Flowers & Co., Willumstad told the court. A last-minute private bank bailout led by JPMorgan Chase & Co. and Goldman Sachs Group Inc. also didn’t pan out, he said.
John Roberson, a Justice Department lawyer who called Willumstad to testify, asked him what AIG’s alternative was to accepting the government’s offer.
“Bankruptcy,” he replied.
Willumstad’s testimony yesterday in federal court in Washington came in the sixth week of the trial over claims by Greenberg’s Starr International Co. that AIG shareholders were cheated in the deal. The government used authority it didn’t have to demand equity and inflicted economic losses through the high interest and the structure of certain transactions, Starr alleges.
Government witnesses have said the deal was legal and voluntarily accepted by the board, a point Willumstad acknowledged — with a hedge.
Asked by Roberson whether the board approved the terms of the bailout “freely and voluntarily,” Willumstad responded, “I’m not sure what you mean by freely, but I’d say voluntarily, yes.”
Willumstad, 69, testified that “there’s certainly some truth” to the contention that AIG didn’t have a sure handle on its cash requirements and that it underestimated the amount of money it ultimately needed.
That bolstered the government’s argument that one reason for the harsh terms was the murkiness of the company’s finances.
Willumstad described a series of unsuccessful efforts to raise cash after a ratings downgrade, declining asset values and other financial setbacks led to a soaring demand for liquidity.
Buffett declined to invest in AIG and told Willumstad that the $25 billion asking price for the company’s property and casualty business “would be too large a transaction at that time,” Willumstad said.
J.C. Flowers, J. Christopher Flowers’s leveraged-buyout firm, wanted to acquire the entire company for “a couple of dollars a share,” a proposal Willumstad said he didn’t take seriously. “Nor did the board,” he said.
A possible deal with Fishman, chairman and CEO of Travelers, to buy AIG’s personal lines of insurance businesses for $7 billion foundered because they were too financially entangled with other company properties, Willumstad said.
That left the government, which already had rebuffed Willumstad’s requests for low-interest financing.