Financially troubled American International Group (
AIG) sought help from the private sector before agreeing to the government bailout that eventually saved the firm, a New York Fed attorney told a judge today.
Thomas Baxter, general counsel of the New York Federal Reserve Bank, testified that the heads of Goldman Sachs Group and JPMorgan Chase, Lloyd Blankfein and Jamie Dimon, attempted to put together its own rescue package of the insurer.
“[Dimon said AIG] ‘is another problem we’re taking care of,’” Baxter said. “I took careful note of that colloquy and it led me to believe that we had another issue in AIG but it was being addressed by the private sector.”
The private bailout, of course, never happened and in September 2008, the New York Fed hired JPMorgan counsel to “essentially take over the documentation of a deal that was originally going to be done by JPMorgan Chase,” Baxter told the judge.
“We were stepping into the shoes of another lender, we were taking over their legal counsel and also their adviser, and then formulating our own proposal to lend to AIG.”
The news emerged in a trial following former AIG CEO Maurice “Hank” Greenberg’s decision to sue the US through Starr International Co., seeking more than $25 billion it said it lost from the insurer’s bailout. Starr says the government’s assumption of 80% of AIG’s stock in exchange for an $85 billion loan was an unconstitutional “taking” of private property.
In other words, Starr is contending the Fed lacks the authority to take equity in a company in consideration of a loan.
Starr also contends that the 14% interest rate charged by the Fed was more than three times higher than it charged other institutions—something that may not have been necessary, according to testimony yesterday from Scott Alvarez, the Fed’s general counsel.
When asked if the Fed’s goals of keeping AIG in business and preventing market disruption would have been achievable with an interest rate half of what it eventually charged, Alvarez replied, “Possibly.”
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