Bernanke AIG Testimony Ends Week of Bailout Architects

Former Federal Reserve Chairman Ben Bernanke is set to retake the witness stand in a lawsuit accusing the government of imposing illegally harsh terms in the bailout of American International Group Inc. (AIG), capping a week of testimony from the architects of the insurers 2008 rescue.

Maurice Hank Greenbergs Starr International Co., AIGs biggest shareholder before the rescue, claims in the lawsuit that the government illegally took equity in the company and that a 14 percent interest rate on the rescue loan was extortionate. Starr is seeking at least $25 billion in damages.

Bernanke, set for his second day of testimony today in the U.S. Court of Federal Claims in Washington, yesterday defended the higher rate, saying the $85 billion loan was intended to prevent the collapse of a systemic firm while the interest kept its shareholders from reaping a windfall.

The former Fed chairman, who was preceded on the witness stand this week by for Treasury secretaries Henry Hank Paulson and Timothy Geithner, has so far given terse, even dismissive responses under questioning by David Boies, and calling the lawyer for Starr a highly formal sir when answering.

He defended the easier terms given to banks and other institutions during the bailout. Low-interest lending was meant to get funds out into the system to improve liquidity, even though it was understood that the action might lead to a windfall for shareholders, Bernanke testified. There were offsetting considerations.

Earlier testimony and documents in the trial, which began Sept. 29, showed that banks paid less than 4 percent interest on their loans from the Fed.

Bernanke said that at the time of the bailout, he didnt know the basis for what a New York Fed official called a crazily high interest rate the government charged AIG.

I have since learned something about it, but at the time I didnt know, Bernanke said. I understand the overall goal was to minimize the windfall to the stockholders of AIG from being bailed out, but I couldnt go term by term and explain them.

Bernanke, Geithner and Paulson were considered the architects of the U.S. response to the financial crisis.

In their testimony, Geithner and Paulson likewise defended AIGs tougher rescue package and testified that a failure by the New York-based insurer would have been catastrophic for the economy.

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Bernanke AIG Testimony Ends Week of Bailout Architects