Fed Counsel Grilled on AIG’s Bailout Terms vs. Banks’

The Federal Reserve Board of Governors set an interest rate for American International Group Inc.’s 2008 bailout loan that was meant to prevent shareholders from reaping a “windfall,” the Fed’s top lawyer testified.

With bankruptcy as AIG’s only alternative, a loan saving the company would allow shareholders to continue “to have value” in the insurer, Scott Alvarez told a judge in Washington Wednesday in a trial over the terms of the rescue. The Fed wanted “to lessen the windfall to the shareholders from AIG receiving assistance,” Alvarez said.

Maurice “Hank” Greenberg’s Starr International Co., the biggest shareholder in AIG when the financial crisis struck, sued the U.S. in 2011 seeking more than $25 billion for losses from the insurer’s bailout. Starr claims the government’s assumption of 80 percent of AIG’s stock in exchange for an $85 billion loan was an unconstitutional “taking” of private property.

In addition to the equity demand, AIG had to pay 14 percent interest, more than triple what banks in financial trouble at the same time had to pay, according to Starr’s complaint.

The rate charged by the Fed was similar to what was discussed in a potential private-sector bailout that never came to fruition, and it also compensated the government for its risk in advancing the money, Alvarez testified on his third day on the witness stand.

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

Scott Austin, a Justice Department attorney, led Alvarez through a series of questions and document reviews aimed at undermining Starr’s allegations that the U.S. didn’t have legal authority to demand equity and discriminated against AIG by imposing harsher terms than it did on struggling banks.

Alvarez testified that the Fed had the power to take and hold equity at least for a short time and that concerns he expressed about the deal involved policy — not legal misgivings as portrayed by Starr’s attorney, David Boies.

Alvarez said he was worried that if the Fed held AIG stock, it would be serving as both an owner and lender, which “don’t always have the same interest.”

Ownership by the Fed might be seen as giving AIG a market edge because of the central bank’s access to confidential information. Fed officials were “concerned about the public perception that AIG was in a privileged place,” Alvarez told Wheeler.

The Fed attorney also said he had been advised by the institution’s accountants that they’d have to combine AIG’s balance sheet with the central bank’s, linking it to “all of the operations, all of the decisions of AIG.”

The Fed transferred its equity in the company to a trust held by the Treasury Department.

In response to a question by Wheeler, Alvarez said the Fed picked 80 percent as the desired level of equity because it enabled control of the company.

Boies, in his questioning of Alvarez, tried repeatedly to elicit answers highlighting the disparity in treatment between some banks and AIG. He also pointed to differences between Alvarez’s court testimony and answers he gave in pretrial questioning by lawyers.

Boies said that in a deposition in which he was being questioned in his capacity as a U.S. official, Alvarez answered “yes” when asked if he agreed with a statement by former Treasury Secretary Henry Paulson that the government had covered risk to taxpayers by securing the bailout loan with AIG subsidiaries which could be sold to repay borrowing.

In court today, Alvarez testified that “there was risk to the loan.”

Queried about the apparent disparity, Alvarez responded, “It’s very difficult to contradict the secretary of treasury.”

“Your personal answer was ‘no’ and you didn’t tell me?” Boies asked. “Did you personally believe that statement was accurate?”

“I don’t remember what I was thinking at the time,” Alvarez said.

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