The Federal Reserve Board of Governors didn’t want to bail out American International Group Inc. with an $85 billion loan, preferring that the insurer find a savior in the private marketplace, the Fed’s top lawyer told a judge.
“We were telling AIG we were not interested in making this loan,” Scott Alvarez, the Fed’s general counsel, testified in the lawsuit brought by Maurice “Hank” Greenberg’s Starr International Co.’s lawsuit alleging the U.S.’s assumption of 80 of AIG’s equity was illegal. “We did everything we could to encourage them to pursue other options.”
The Fed board would “just as soon not have made this loan if they could have avoided it,” Alvarez testified.
In the days leading up to the mid-September 2008 bailout, Donald Kohn, the vice-chairman of the Fed at the time, “was generally discouraging” to AIG officials about prospects for a central bank lifeline “because he believed they should pursue a private sector solution,” Alvarez testified.
Alvarez also told the court he “had no doubt” that the Fed had the legal authority to take an equity position in a company as it did with AIG.
Alvarez made his comments during cross-examination by Justice Department lawyer Scott Austin after more than nine hours of questioning by Starr’s lawyer, David Boies. Starr lawyers had estimated that Alvarez would be on the witness stand for 2 1/2 hours at the nonjury trial at the Federal Court of Claims in Washington.
Starr claims the the assumption of AIG stock by the Federal Reserve Bank of New York in exchange for the $85 billion loan amounted to an unconstitutional “taking” of private property. Starr was AIG’s largest shareholder when the financial crisis struck.
Starr contends that the Fed didn’t have the legal right to demand the surrender of equity in exchange for a bailout.
Earlier in the day, under questioning by Boies, Alvarez defended loosened collateral standards for low-interest loans the Fed made available to investment banks.
He disputed the statement that the Fed “lowered its standards” in granting loans against non-investment grade securities, calling that a “value judgment.”
“I do not agree that it’s less safe,” he said.
Boies introduced several e-mails and other correspondence revealing U.S. uncertainty about its authority to structure the rescue of AIG in a way that would allow the Fed to take control of the insurer and head off shareholder opposition.
He asked Alvarez about an e-mail sent to him on Sept. 21, 2008, days after the bailout, by a New York Fed lawyer who wrote, “I am trying to keep this moving because of a concern that there will be a shareholder action.”
Alvarez testified that regulators were concerned shareholders would “do things that would not be in the interest of repaying the loan.”
Referring to other documents in which regulators express misgivings about the extent of their powers, Boies asked Alvarez, “Did you agree the New York Fed didn’t have authority to purchase equity?”
“It depends what you mean by purchase,” Alvarez replied, saying he couldn’t respond because “purchase” is too ambiguous a word.
The back-and-forth was one of several strained exchanges between Boies and Alvarez.
Greenberg, who built AIG into the world’s biggest insurer before leaving in 2005, claims the government should have provided at least $25 billion in compensation. He argues that banks including Morgan Stanley and Citigroup Inc. got bailout loans at rates of less than 4 percent without surrendering shares while AIG was charged 14 percent.
The government says Starr’s alternative to the Fed’s bailout was bankruptcy. AIG returned to profitability and repaid the assistance in 2012, leaving the government with a $22.7 billion profit.
The trial, which began Sept. 29, is expected to last six weeks. Alvarez is among 85 prospective witnesses. Former Federal Reserve Chairman Ben Bernanke, ex-Treasury Secretary Henry Paulson and former Treasury Secretary Timothy Geithner, the head of the New York Fed at the time of the bailout, are scheduled to appear next week.
The case is Starr International Co. v. U.S., 11-cv-00779, U.S. Court of Federal Claims (Washington).