Former Fed chief Ben Bernanke defends AIG bailout in court

Former Federal Reserve Chairman Ben S. Bernanke testified in federal court Thursday that insurance giant American International Group Inc. had to be rescued by the government in 2008 to avert global catastrophe.

Bernanke took the stand at a trial of a lawsuit brought by former AIG Chairman and Chief Executive Maurice Greenberg, who is suing the government over its handling of AIG’s bailout loan. Bernanke was one of the key decision makers on the bailout, which began with an $85-billion rescue loan from the New York Federal Reserve in September 2008 and grew to nearly $185 billion in federal aid.

In early questioning, Bernanke kept his answers terse when asked about the potential damage an AIG collapse might inflict.

“Certainly there was an enormous amount of stress on financial institutions” in the fall of 2008 after mortgage financiers Fannie Mae and Freddie Mac had been taken over by the government and fear cascaded through financial markets, Bernanke said.

It was a rare appearance by a former Fed chairman on the witness stand at a trial.

Greenberg, who was AIG’s biggest shareholder, is suing the federal government for about $40 billion in damages. He asserts that it violated the Constitution’s 5th Amendment by taking control of AIG without “just compensation” for the shares it received. The government took control of 80% of AIG’s stock in exchange for the bailout aid.

New York-based AIG, which had operations around the globe, spiraled toward collapse after making huge bets on mortgage securities that soured. It has since repaid the loan, and the government says taxpayers ultimately earned $25 billion on the investment in the company.

David Boies, the attorney representing Greenberg, questioned Bernanke about a meeting of the Fed governors on Sept. 16, 2008, to approve the emergency loan to AIG, and the extent to which details of the proposed terms of the loan were discussed.

Bernanke said he couldn’t recall whether specific details, such as various fees to AIG, were discussed before central bank officials voted.

The terms of the loan included the huge government stake in the company and an interest rate called “crazily high” by a government official, according to an email produced in court Wednesday.