The failure in 2008 of American International Group Inc., the world’s biggest insurer, would have caused “mass panic on a global scale,” Timothy Geithner, the head of the Federal Reserve Bank of New York at the time, testified at a trial over the government bailout of the company.

Geithner, one of three architects of the U.S. response to the 2008 financial crisis, testified in response to claims by Maurice “Hank” Greenberg’s Starr International Co. that the government illegally took equity in AIG. Geithner was responsible for setting what a Starr lawyer called “an extortion rate” of 14 percent on an $85 billion loan to AIG.

In contrast with his predecessor at treasury, Henry Paulson, who testified yesterday and finished well ahead of schedule with short, direct answers, such as “you betcha,” Geithner has so far been more cautious, frequently telling Starr’s lawyer David Boies that he didn’t remember details of AIG’s rescue effort.

When asked by Starr’s Boies how much financial help AIG received as the fiscal and credit situation in the U.S. worsened in 2008, Geithner responded: “I don’t carry those numbers around in my head.”

Several copies of Geithner’s book, “Stress Test,” some with pages marked with Post-it notes, lay on the plaintiff and defense tables, fodder for questioning ahead. Boies used a similar tactic yesterday, focusing on key pages in Paulson’s book, “On the Brink,” in questioning the former treasury secretary. Ben Bernanke, the former chairman of the Federal Reserve, is scheduled to take the stand tomorrow.

Send Message

Paulson testified that regulators wanted to send a message to markets that government help would cost them.

“It was important that terms be harsh because I take moral hazard seriously,” Paulson said yesterday in federal court in Washington, referring to the economic term for consequence-free risk-taking.

Starr, AIG’s largest shareholder at the time of the bailout, claims the government punished the insurer by demanding equity and imposing a far higher interest rate than other bailout recipients, such as banks, had to pay. Starr, whose chief executive officer Greenberg led AIG for almost 40 years, is seeking at least $25 billion in damages for shareholders.

The case is being heard by U.S. Court of Federal Claims Judge Thomas Wheeler without a jury.

The case is Starr International Co. v. U.S., 11-cv-00779, U.S. Court of Federal Claims (Washington).