Former American International Group Inc. Chief Executive Officer Edward Liddy defended his decision to work closely with the government at the time of the company’s 2008 bailout, saying he hoped to win concessions on the harsh terms of an $85 billion loan.
Liddy’s testimony capped a weeklong examination of the government’s influence on AIG management in the trial of a lawsuit challenging bailout conditions by the insurer’s then- largest shareholder, Maurice “Hank” Greenberg’s Starr International Co.
Starr alleged that the government didn’t have authority to demand an 80 percent equity stake as a condition of the loan and that it further cheated shareholders by taking control of AIG.
If AIG hadn’t accepted the loan from the Federal Reserve Bank of New York it would have wound up in bankruptcy and stockholders “would have been wiped out,” Liddy told a government lawyer yesterday in Washington federal court.
Liddy, who was recruited to the AIG post by then-Treasury Secretary Henry Paulson, testified that he opted to work closely with the government to try to modify what he regarded as the most onerous aspects of the loan, a 14 percent interest rate and a two-year term.
‘Full Partner’
“I made the decision to treat them as a full partner” and “invite them under the tent, so to speak,” he said while being questioned by J.J. Todor, a Justice Department lawyer.
The more the Fed understood about the insurer the more likely it would be to change some of the terms of the loan to be more favorable to the company, he said.
Liddy said he focused on repaying the loan and tried to return the insurer and its subsidiaries to financial health.
“I did not want to have a wounded animal that died a slow, painful death,” he testified. “These businesses are fit to fight and they’re doing very well.”
Starr’s lawyer, David Boies, sought to show that the partnership described by Liddy amounted to government control.
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.
The AIG board voluntarily accepted the terms of the deal and its only alternative was bankruptcy, the government contends. A bailout of AIG, once othe world’s largest insurer, was needed to prevent catastrophic damage to the economy, according to Kenneth Dintzer, a Justice Department lawyer.
‘Save the World’
“The goal was not to save AIG,” Dintzer said in opening statements on Sept. 29. “The goal was to save the world from AIG.”
Under questioning by Boies yesterday, Liddy testified that he supported a reverse 20-1 stock split in 2009 only to boost AIG’s lagging share price.
“We were in danger of being de-listed by the New York Stock Exchange,” he told Boies. “I didn’t want that to happen.”
Starr contends the reverse split was designed to allow the government to get a desired proportion of common stock without winning a shareholder vote. The maneuver reduced the number of issued shares while leaving untouched authorized shares.
The effect of that tailoring was to enable the government to convert preferred shares to common stock from the undiminished pool of authorized shares, endrunning a shareholder vote against increasing the number of authorized shares, according to Starr’s lawsuit.
Boies asked Liddy, as an experienced businessman and former head of the Goldman Sachs Group Inc. board audit committee, if he’d ever heard of a reverse split that applied only to issued shares.
“I just didn’t focus on those mechanics,” Liddy testified.
Boosting the share price “was the only reason I wanted it done,” he told the court.
Goldman Board
Liddy, a former CEO of Allstate Corp., was serving on Goldman Sachs’s board when, according to his testimony two days ago, the head of Goldman Sachs’s investment banking unit at the time, Christopher Cole, asked him if he’d be interested in the AIG post.
“Did you think that there was anything unusual or strange about having the chairman of the investment banking division of Goldman Sachs be the first person to call you, to ask you if you would become CEO of AIG?,” Boies asked.
“I did not,” Liddy replied. He said he’d known Cole for 20 years and presumed that Paulson, a former Goldman Sachs CEO, wanted “someone to make the initial contact that I knew well.”
Paulson Adviser
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.
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.
Goldman Sachs also was involved in a last-ditch private sector effort to bail out AIG days before the New York Fed agreed to make the rescue loan.
Liddy testified that he played no role in AIG decisions involving Goldman Sachs while running 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.
Board Meetings
New York Fed representatives were often present at AIG board meetings and while they usually didn’t speak up during the sessions, they might follow up “after the fact” if something concerned them, Liddy said.
Liddy insisted that despite the New York Fed’s involvement, the board of AIG was still independent, “populated by mature, sophisticated” individuals who were “not shy.”
Liddy testified that he succeeded in extending the term of the bailout loan to five years from two years and that he successfully pressed the government to lower the interest rate.
“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 in November 2008 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.”
Fed’s Monitor
Earlier in the week, Boies confronted Sarah Dahlgren, the New York Fed’s monitor of AIG after the bailout, with documents suggesting the government was running the insurer.
Boies showed Dahlgren an April 2009 e-mail to her from one of the bank’s attorneys asking for comment on a draft version of an AIG proxy statement and noting an upcoming call to discuss the document.
AIG executives were “not on the invite list” to participate in the call, Dahlgren said.
Boies also showed the court a February 2009 e-mail, in which a Federal Reserve official told Treasury Department counterparts that his bosses wanted the New York Fed “to have people lined up to replace the board of directors and assign a successor to Liddy.”
Another witness, Margaret McConnell, a former deputy chief of staff to then-New York Fed President Timothy Geithner, was shown a March 2009 e-mail she received from a colleague stating that Liddy “has no decision-making authority and is paralyzed at this point by the USG’s role.”
McConnell said she didn’t remember the e-mail and pointed out that restrictions on corporate governance accompanied U.S. financial assistance to other companies during the financial crisis.
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).