AIG ex-CEO Willumstad testifies bailout was only option

Willumstad testified that after receiving a paper copy of the government's rescue offer on Sept. 16, 2008, he took a call from then-Treasury Secretary Henry Paulson and Timothy Geithner, at the time the head of the Federal Reserve Bank of New York. He said Geithner told him the conditions delivered toAIG "were the only terms we were going to get."

Then Paulson got on the line and told him that "one of the conditions was that I would be replaced as CEO," Willumstad testified. Paulson told him that Edward Liddy, a former Allstate Corp. CEO, would be his successor, said Willumstad, who is now chairman of Adelphi University in Garden City, New York.

Starr's lawyer

David Boies, Starr's lead attorney, cross-examined Willumstad today before U.S. Court of Federal Claims Judge Thomas Wheeler, who is hearing the case without a jury. Willumstad said Geithner and other regulators told him repeatedly that AIG shouldn't count on government assistance.

Yesterday, Marshall Huebner, a lawyer for the New York Fed, concluded his testimony, much of it covering the legal reasoning for the structure of parts of the bailout.

Demanding that AIG provide preferred shares instead of warrants for common stock as originally contemplated allowed the New York Fed to head off de-stabilizing challenges to control of the company which might have undermined the government's goal of calming the economy, Huebner testified.

Starr asserts that the switch was made to avoid accountability to shareholders for the onerous terms of the rescue.

AIG directors served only one-year terms and service was not staggered, meaning directors were at a "relatively high risk of being fired in one shot," Huebner said.

Preferred shares

That made it imperative for the government to claim its controlling interest, something that could be most quickly done by getting preferred shares, which didn't require a shareholder vote or any other action beyond board approval, he said.

"You could sculpt the preferred to what the board wants," Huebner told the court.

Huebner also testified that the New York Fed sought to strike a balance between limiting involvement in AIG while protecting taxpayer investment in the company.

"The Fed didn't want to have intrusive or unworkable involvement," said Huebner, of the law firm Davis Polk & Wardwell LLP.

"'Not controlling' was continually a pulsating thought we kept hearing from our client," Huebner said under questioning by Josh Gardner, a Justice Department lawyer.

Wheeler signaled his continued interest in the question of the Fed's authority to demand equity in a company during questioning of Huebner on that subject on Nov. 4.

"Whatever this witness says cannot change the language in the statute or in other legal memos that we have in evidence," the judge said.

In a preliminary ruling in the case in 2012, Wheeler wrote that he didn't accept the government's position that the Fed's emergency powers allowed it to demand stock from a company.

The case is Starr International Co. v. U.S., 11-cv-00779, U.S. Court of Federal Claims (Washington).