Ex AIG chief executive Robert Willumstad has told a US Federal Court that there was no choice when it came to accepting a government bailout in late 2008, and that the board of AIG acted in the best interests of "all the stakeholders" of AIG when it accepted an $85bn deal from the US government at 14% interest.
Starr International, at the time the leading shareholder in AIG, is suing the US government for up to $40bn in damages, claiming that the terms of the bailout were extortionate and that they violated the constitutional rights of shareholders.
Willumstad was forced to step down as AIG boss in favour of former Allstate chief executive Ed Liddy as a condition of the government rescue.
Willumstad had attempted to put together a privately funded rescue, but he told the court that discussions with Berkshire Hathaway's Warren Buffett, JC Flowers, Travelers' Jay Fishman, and a hoped-for last-minute ceal with Goldman Sachs and JP Morgan Chase, had all come to nothing. Flowers, it transpired, offered "a couple of dollars a share", which Willumstad said that neither he nor the AIG board took seriously.
Willumstad said that there were two options, a government rescue, or bankruptcy.
Starr is not contending the need for a rescue, but claims that the terms were still unjust. It also claims that AIG effectively signed the rescue deal with a gun to its head.
When asked by Justice Department lawyer John Roberson whether the deal had been accepted by the AIG board freely and voluntarily, Willumstad responded "I'm not sure what you mean by freely, but, voluntarily, yes".
Willumstad also conceded, at least in part, that AIG was not quite aware of how much money it would need. The government side has argued that one reason for the relatively harsh rate of interest – more than three times the amount charged to some US banks that were effectively rescued by the US government – was the unsure state of AIG's finances.
The details of the rescue were revealed in court, with Willumstad saying that, after receiving a paper copy of the government’s rescue offer on September 16 2008, he was telephoned by then-Treasury Secretary Henry "Hank" Paulson and then head of the Federal Reserve Bank of New York Tim Geithner. Willumstad testified that Geithner told him the government's loan conditions would not be improved.
It was Paulson who then said that one of the conditions was that Willumstad would be replaced as CEO by Ed Liddy.
A previous witness, New York Fed lawyer Marshall Huebner, shed light on the controversial decision to grant the government preferred shares rather than the more standard equity collateral of warrants for common stock. That move permitted the New York Fed to head off at the pass any potential shareholder rebellion, said Huebner. He said that it was imperative that the government claimed its controlling interest. "‘Not controlling’ was continually a pulsating thought we kept hearing from our client" said Huebner.