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AIG Lawsuit Presents Different Versions Of 2008 Bailout

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MELISSA BLOCK, HOST:

The financial crisis of 2008 has been the backdrop of a fight playing out in a federal court in Washington all week. Specifically, it's a lawsuit over the government's bailout of AIG. On the stand, former Federal Reserve Chairman Ben Bernanke defended the rescue, saying it saved the company and the global financial system. NPR's John Ydstie has been in court all week and joins me now And, John, first remind us who's bringing this lawsuit and why.

JOHN YDSTIE, BYLINE: WELL, Hank Greenberg has sued the government, arguing that the bailout was illegal and it unfairly punished AIG shareholders. Greenberg was the biggest shareholder at the time of the bailout and a former CEO of the giant insurance firm. He's seeking $40 billion in compensation for shareholders.

BLOCK: And what's the evidence to support his claim here?

YDSTIE: Well, Greenberg's attorney, the famous trial lawyer David Boies, has been making the argument that when you look at the terms of the loan AIG received, they're much tougher than those offered to other companies - specifically, an interest rate in excess of 12 percent and a requirement that AIG give almost 80 percent of its shares to the government.

BLOCK: And that was the government's justification for that?

YDSTIE: Well, today former Fed chairman Ben Bernanke said the Fed very much did not want to make that loan but it had to because AIG was going to fail. And it was so entangled with other firms, because of the insurance it was providing, that it would've brought down the whole global financial system if it did fail. Bernanke said the Fed required such tough terms because it wanted to avoid creating something called moral hazard. That is if it bailed out AIG on easy terms, other companies might be encouraged to make reckless investments, thinking if they got in trouble the government would bail them out too. Bernanke said in bailing out AIG, the Fed actually spared it the discipline of the market, which likely would have meant bankruptcy.

BLOCK: So you're saying Bernanke admits that the terms for AIG were tougher than the terms imposed on other firms. Why wasn't he worried about that same moral hazard with those firms?

YDSTIE: Well, he was but the Fed had other issues it had to balance. You have to remember the banking system was freezing up at the time. And to unfreeze it, the Fed had to get money into the system. So for a group of the nation's biggest banks, the Fed wanted to give them loans. Those banks are called primary dealers and they're the key firms that make the financial markets work. So the Fed offered them money at much lower interest rates than AIG to entice them to borrow.

BLOCK: And, John, you mentioned earlier that Greenberg claims that the government's bailout was illegal, even though the AIG board approved it. What's the basis of that argument?

YDSTIE: Well, a lot of that centers around the question of whether the Federal Reserve Board of Governors, which Bernanke had said legally signed off on the tough terms of the loan that AIG received. Greenberg's attorney, David Boies, questioned Bernanke pointedly on this. Bernanke acknowledged the terms were not completely set when the governors voted. After all, this was happening just as Lehman Brothers was going under, and there were many other fires the Fed was trying to put out. But Bernanke argued the final terms were within the scope of what the governors had approved and so the AIG loan with legal.

BLOCK: OK, NPR's John Ydstie. John, thanks very much.

YDSTIE: You're welcome.

BLOCK: You're listening to ALL THINGS CONSIDERED. Transcript provided by NPR, Copyright NPR.

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