Former American International Group Inc. Chief Executive Officer Edward Liddy testified he chose not to buck government overseers who selected him to run the bailed- out insurer.
Developing trust with regulators was for the “benefit of AIG,” he told the attorney for Maurice “Hank” Greenberg’s Starr International Co. in the trial over claims the bailout cheated the insurer’s shareholders out of at least $25 billion.
David Boies, the lawyer, asked him if he made any major decision without the input of Federal Reserve or U.S. Treasury Department officials.
“I could have, Mr. Boies. I just chose not to,” Liddy replied.
Starr, which was AIG’s largest shareholder before the 2008 rescue, accuses the government of illegally taking 80 percent of its stock in consideration of an $85 billion bailout loan. The U.S. also broke the law by taking control of the company, Starr contends.
The U.S. had a hand in everything from vetting press releases to selecting AIG board members, according to testimony and documents introduced into evidence by Boies this week.
The AIG board voluntarily accepted the terms of the deal and its only alternative was bankruptcy, the government contends. A bailout was needed to prevent catastrophic damage to the economy, according to Kenneth Dintzer, a Justice Department lawyer.
“The goal was not to save AIG,” Dintzer said in opening arguments on Sept. 29 in federal court in Washington. “The goal was to save the world from AIG.”
Goldman Board
Liddy, a former CEO of Allstate Corp., was serving on Goldman Sachs Group Inc.’s board when, according to his testimony, he was recruited to the AIG post by Christopher Cole, at the time the head of Goldman Sachs’s investment banking unit.
Liddy testified that he considered Cole an emissary of then-Treasury Secretary Henry Paulson, a former Goldman Sachs CEO, who called him after he agreed to take the post.
Another former Goldman Sachs executive, Ken Wilson, who was serving as an adviser to Paulson, also urged him to take the position, Liddy told the court.
Starr contends the government wanted control of AIG’s assets to facilitate a “backdoor bailout” of the New York- based insurer’s investment bank trading partners, including Goldman Sachs, and that it manipulated the company’s governance to avoid a shareholder vote on the rescue package.
Counterparty Funds
Goldman Sachs was described in Congressional testimony introduced into evidence as receiving $12.9 billion from AIG, the largest payout of counterparty funds from the insurer.
Liddy said he agreed to serve as AIG’s CEO on Sept. 16, 2008, the first day of the bailout.
He replaced Robert Willumstad, whose resignation was a condition of the rescue.
Boies sought to show that Liddy was acting as CEO before he was confirmed by the AIG board on Sept. 18.
The lawyer confronted Liddy with talking points for a town hall meeting with AIG executives e-mailed on Sept. 17 to Sarah Dahlgren, an official with the Federal Reserve Bank of New York charged with monitoring the insurer. Dahlgren earlier testified that Liddy had requested them.
“I don’t remember them,” Liddy said.
Liddy testified that he didn’t meet with AIG managers until Sept. 18, after he was “duly appointed chairman and CEO.”
Town Hall
Although the details of the bailout loan weren’t fully fleshed out until Sept. 22, Liddy said he felt AIG had a binding agreement with the Fed on Sept. 16, because funds were “flowing.” The government provided AIG with $14 billion that night, according to earlier testimony.
A term sheet approved by regulators on Sept. 16 “is what gave rise to the arrangement between the Federal Reserve and the company,” Liddy said. The loan had many “to-be-determined” elements before it was finalized on Sept. 22, he said.
When asked about some of the details of the loan, such as a provision for a trust to hold the government’s stock in AIG and a requirement for equity, Liddy said “the mechanics of this were very complicated” and he relied on the advice of lawyers.
When Boies asked specifically about whether he understood the form of the equity to be warrants, Liddy replied, “I just did not concentrate” on the form of equity. “There were so many other more pressing aspects of this loan agreement.”
Equity Shift
Starr’s complaint alleges that the government shifted the kind of equity it demanded to preferred shares when it realized that a warrant would be subject to shareholder approval it could not win.
Liddy testified that he concentrated on trying to lengthen the initial two-year term of the loan, and on lowering what Starr says was a 14 percent interest rate. Liddy said he regarded improving the terms as a more pressing concern than the nature of equity going to the government.
“It was like walking on eggshells,” he testified regarding efforts to get the Fed to bring down the rate.
“It was a negotiated process,” he said. The rate was lowered weeks later as part of a restructuring of financing that also included an injection of $40 billion via the Treasury from the Troubled Asset Relief Program.
Liddy characterized his strategy as “what can we do to make this better” to make sure “the Federal Reserve will get repaid.”
Liddy is scheduled to continue his testimony today.
The case is being heard without a jury by U.S. Court of Federal Claims Judge Thomas Wheeler.
The case is Starr International Co. v. U.S., 11-cv-00779, U.S. Court of Federal Claims (Washington).
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