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Ex-Fed Chair Bernanke: wanted to stop AIG default, not punish firm

Saturday, October 11, 2014 - 06:28
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Former Federal Reserve Chairman Ben Bernanke said on Friday that he was hesitant to bail out American International Group in 2008, but he was primarily concerned that the insurer "was on the brink of default" and not about punishing AIG - PHOTO: AFP

[WASHINGTON] Former Federal Reserve Chairman Ben Bernanke said on Friday that he was hesitant to bail out American International Group in 2008, but he was primarily concerned that the insurer "was on the brink of default" and not about punishing AIG.

Bernanke's comments came in a fifth day of testimony by former top government officials, who sought to convince a federal judge that their actions in rescuing the insurance company were legal.

Bernanke, on the witness stand for a second day, said he initially hoped that AIG might find a private-sector solution and worried that the insurance giant's management underestimated the extent of its problems.

When the initial US$85 billion loan package for AIG was approved by the Fed, Bernanke, who left the central bank earlier this year, said he was focused on the idea that "our intervention would spare it the discipline of the market." Former AIG Chief Executive Hank Greenberg, who was the company's largest shareholder before the bailout, sued the government in 2011. He argued that the loan, which carried an interest rate of more than 12 per cent and a nearly 80 per cent US stake in AIG, resulted in an illegal takeover from shareholders.

David Boies, Greenberg's lawyer, has sought during the trial to show that AIG got a worse deal than ailing US banks and other institutions that got crisis-era support.

On Friday, Boies pressed Bernanke about how much latitude the Fed had in structuring emergency loans and sought to show that AIG shareholders got short-changed because regulators wanted to punish the insurer for perceived mismanagement in the run-up to the financial crisis.

AIG ran into trouble during the crisis over insurance products it sold banks that were tied to bad mortgage loans. Former Treasury Secretary Henry "Hank" Paulson testified earlier this week that the bailout terms were meant to be punitive.

Boies quizzed Bernanke about why the insurer was not allowed to access other Fed loan programs that already existed at the time.

To show how much discretion the Fed had over such lending, Boies asked whether it legally could have rejected companies' requests for cash because of their political leanings.

Bernanke said he was not directly involved in crafting the loan terms. But he said they needed to be tough so shareholders would not get a "windfall" from a bailout and to reflect the risk of making the loan. "No reasonable person could conclude that it was anything other than a risky loan," he said.

He said Fed officials also worried that AIG did not have a plan to wean itself from government support.

The bailout ultimately rose to US$182.3 billion, an amount AIG repaid in full by December 2012, yielding a US$23 billion profit for the government.

The lawsuit, which is being tried in the Court of Federal Claims in Washington, won class action status in May 2013. - Reuters