Talk about a "stress test."
More than six years after the collapse of Lehman Brothers, Ben Bernanke, Henry "Hank" Paulson and Tim Geithner — the crisis-era trio that orchestrated the bank bailouts — are being summoned to Washington again to answer for the controversial rescue of AIG.
The three are expected to testify in a long-running lawsuit that accuses the federal government of shafting AIG shareholders when it extended a $182 billion lifeline to the failing insurance giant in 2008.
Former Federal Reserve chief Bernanke, along with Paulson, the Treasury secretary when the mortgage bubble burst, and Geithner, who headed the New York Federal Reserve before taking over the Treasury, are set to testify during a trial that starts on Monday.
The trial, which is expected to last at least two weeks, will revisit allegations lobbed at the three while they battled the financial crisis: They saved Wall Street while letting Main Street suffer.
The case revisits a time those policymakers would rather forget and comes just as regulators are facing fresh criticism that they were too cozy with the banks they were overseeing.
Last week, 46 hours of tapes secretly recorded by Carmen Segarra, a former bank examiner for the New York Fed who was fired in 2012, depicted financial watchdogs as little more than bank taskmasters who bent over backward to appease Goldman Sachs.
The AIG suit, brought by former Chairman Maurice "Hank" Greenberg, accuses the government of imposing an "extortionate interest rate" — around 11 percent on the $85 billion initial loan — that was far less favorable than the terms extended to teetering banks.
Greenberg, chairman of his investment vehicle, Starr International, argues the government should pay $40 billion for imposing the loan-shark-like rate and taking a 90 percent stake in the company without giving shareholders including him adequate compensation. Other banks were able to borrow at around 5 percent under the Troubled Asset Relief Program, or TARP, the suit claims.
The 11 percent interest rate included a "penalty" but wasn't different from the figures bankers at JPMorgan Chase and Goldman had arrived at to save the ailing company, Geithner wrote in his account of the 2008 crisis, "Stress Test: Reflections on Financial Crises."
Greenberg's case, which will be determined in a non-jury trial in the US Court of Federal Claims, is reportedly being bankrolled by some of Wall Street's biggest names, including Ken Langone, former head of the New York Stock Exchange, and J. Christopher Flowers, who runs his own private-equity company.
Greenberg and other critics argue that the rescue of AIG was really another bank bailout. AIG was on the hook for billions in claims owed to Goldman and other banks that had bought insurance to cover bad financial bets.
If it had collapsed, the banks would not have gotten paid.
"Letting AIG fail seemed like a formula for a second Great Depression," Geithner wrote in his book. "It was essential we do everything in our power to try to avoid that."
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