WASHINGTON — Former Federal Reserve Chairman Ben Bernanke etched a portrait Friday of his initial reluctance to have the central bank rescue American International Group Inc. in 2008. But he ultimately came to believe the $85 billion bailout loan to the company was needed to avert a shock to the financial system.
At the same time, Bernanke insisted he didn't agree with other government officials that AIG's dire financial state largely resulted from excessive risk-taking by management — a view that led them to punish the insurance giant with harsh loan terms.
"I did not make any personal judgments about the quality of management at AIG," Bernanke said in his second day of testimony at the trial of a lawsuit brought by former AIG Chairman and CEO Maurice Greenberg.
Greenberg is suing the government over its handling of AIG's bailout loan in the depths of the financial crisis.
Bernanke said he was dissatisfied, though, with the information AIG gave the Fed in the days before it received the rescue loan and as it scrambled to find private financing to stay afloat.
"They were pretty vague about the cash they needed and how long it would last," he said.
Greenberg, who was AIG's biggest shareholder, is suing the federal government for some $40 billion in damages, asserting that it violated the Constitution's Fifth Amendment by taking control of AIG without "just compensation" for the shares it received. The government took control of 80 percent of New York-based AIG's stock in exchange for the bailout aid.
Bernanke was one of the key decision-makers on the bailout, which began with the $85 billion loan from the New York Fed amid the crisis in September 2008 and grew to nearly $185 billion in federal aid. The Federal Reserve governors in Washington, headed by Bernanke, approved the loan.
In that process, the New York Fed was given "reasonable latitude" by the Fed governors in setting the interest rate and other terms of the loan, Bernanke said Friday.
Henry Paulson, who was Treasury secretary at the time, testified earlier in the week that AIG deserved punishment for the risks it had taken on in the years before the housing bust in 2007. And Timothy Geithner, who was president of the New York Fed at the time of the loan, said Thursday that he and his colleagues believed that AIG's financial recklessness was at the root of its troubles and that the government was looking to impose losses on shareholders of bailed-out companies that were in proportion to the bad decisions made by their managers.
The loan terms included the huge government stake in the company and an interest rate much higher than what other big financial companies paid in the bailout.
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.
Under questioning by Greenberg's attorney David Boies, Bernanke continued to give some terse answers or say he couldn't recall specific details of the AIG loan and the Fed governors' discussion of it at their Sept. 16, 2008 meeting before approving it.
But Bernanke later spoke expansively when the government's lead attorney, Kenneth Dintzer, drew him out on his judgments on the wisdom of the government bailout out AIG in the tumult of September 2008.
"We very, very much did not want to make a loan of this sort," Bernanke said. "It took us into a whole new category of firm" that were not banks. "We didn't want to be in a position where every company in America would call us up and ask for a loan."
Bernanke said that through the crisis he, Geithner and Paulson "worked very closely together .... I think we made an effective team."