AIG Bailout Trial Bombshell II: Fed and Treasury Cornered AIG’s Board into Taking a Legally-Dubious Bailout

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As we said in our companion post today on the AIG bailout trial, former AIG CEO Hank Greenberg may have a case after all. Mind you, we are not fans of Greenberg. But far too much of what happened during the crisis has been swept under the rug, in the interest of preserving the officialdom-flattering story that the way the bailouts were handled was necessary, or at least reasonable, and any errors were good faith mistakes, resulting from the enormity of the deluge.

Needless to say, the picture that emerges from the Greenberg camp, as presented in the “Corrected Plaintiff’s Proposed Findings of Fact,” filed in Federal Court on August 22, is radically different. I strongly urge readers, particularly those with transaction experience, to read the document, attached at the end, in full. It makes a surprisingly credible and detailed case that AIG’s board was muscled into a rescue that was punitive, when that was neither necessary nor warranted. And the tactics used to corner the board were remarkably heavy-handed.

Note that our earlier post describes that, contra previous accounts, AIG had numerous deep-pocket suitors petitioning Treasury to buy into struggling insurer. That means that rather than having the US nationalize the insurer, it would have been viable to see if a mere bridge facility could have been taken out by a consortium of investors. If that failed, the nationalization option remained open. The failure to take that course makes the idea that the AIG bailout was intended to serve as a money laundering vehicle for wobbly banks, a theory before that sounded like a stretch, appear far more credible.

Another hard-hitting charge in the filing by Greenberg’s attorneys is that the Fed didn’t have the authority to take an equity stake in AIG, yet clearly did so before passing it to a trust, which was a clear sham. The trust has only three trustees, with no meaningful staff. Government officials operated in a very open manner in managing AIG, from installing the new CEO, a Goldman board director Ed Liddy, new board members, putting staff on site, and even meeting with ratings agencies about ratings decisions.

Now you might say that all these legal fine points were niceties. But the violations of both normal governance practices, the most important being asking the AIG board repeatedly to make decisions while withholding critical information or making actual misrepresentations, and of various laws, were significant and numerous.

Another stunning new allegation in the “Corrected Proposed Findings of Fact” document is that, in stark contrast with previous claims by the Fed, that only UBS was willing to take a haircut, it turns out the New York Fed only bothered talking to eight of the 16 counterparties (and then as we already know from the SIGTARP report on this issue, using a script that was delivered by junior staffers, as opposed to having Geithner or Paulson call and force them to take a haircut). Moreover, BlackRock, which was advising the Fed, believed that Bank of America and Goldman would be receptive to discounts.

Contrast the railroading of AIG with the kid gloves treatment of preferred parties. Recall Geithner’s sanctimonious claims about needing to respect contracts when that excuse served the Fed-Treasury combo, as the pretext for forcing discounts on the payments of credit default swaps with AIG, or for paying high wages to AIG staffers who were working on winding down the operations of AIG Financial Products, hardly as demanding a job as running an ongoing entity. It’s these repeated, public professions of the need to be scrupulous about observing proper protocols that make the AIG railroading look so striking.

Mind you, I do not buy everything this filing is selling. For instance, they argue that some of the value of AIG was shifted into two bailout-related vehicles, Maiden Lane II and III. That’s a potentially legitimate point. However, they argue for what was “taken” from Greenberg based on the eventual payout on both. The problem with that approach is ZIRP and QE were continuing subsidies to the banks, and thus to AIG. Conceptually, it’s not obvious why Greenberg should get that benefit, since AIG did have to be salvaged in some manner in September 2008, and a rescue then (say with considerable investment by a foreign consortium) would mean valuations on the toxic CDOs would need to be taken around that time.

Greenberg’s lawyers also base that valuation argument on work done by BlackRock, which as the asset manager for the Fed, could be argued to be not predisposed to AIG’s side. However, BlackRock could be argued to be expected, to the extent reasonable, to make the Maiden Lane vehicles look like good investments, and hence have an optimistic bias to their valuations. We were doing valuation work on the Maiden Lane vehicles, and based on the information we had, the initial valuations looked to be inflated. But the flip side is that the Maiden Lane II and III counterparties, as part of the deal, got a very valuable release from liability, and the Maiden Lane vehicles (and even more so, AIG) was never paid for that bennie.

There is a lot of salacious material in the document. For your reading pleasure, I’ve extracted some key sections below:

Fed and Treasury Muscling the AIG Board

CEO Robert Willumstad, who desperately needed some sort of bridge loan, was given a term sheet to review on September 16. It was a “drop dead” offer. Take a credit facility for up to $85 billion, with an interest rate of 650 basis points over Libor, and give up 79.9% of the company, which the AIG side understood to be in the form of warrants. He was also told he had to get board approval in two hours. The document was amateurish:

(a) At around 3 or 3:30 pm on September 16, 2008, AIG’s outside counsel showed Willumstad a term sheet that was “maybe two pages” and that was “mostly bullet points. It wasn’t a professional looking document” but rather looked like it “may have been put together by” Willumstad’s “grandchildren” who are “ten and twelve” (Willumstad (Oct. 15, 2013) Dep. 269:22-271:8). (numbered text page 24, PDF page 28)

Then get a load of this (emphasis original):

12.1 The AIG Board was never presented with the version of the term sheet Defendant claims was executed.

12.1.1 Willumstad was the only member of the AIG Board of Directors that 12.1.1saw a term sheet on September 16, 2008.

12.1.2.The term sheet Willumstad saw on September 16 has not been produced in this litigation.….

(d) After the AIG Board of Directors meeting on September 16, 2008, Willumstad signed a single signature page that had nothing attached (JX 76 at 1-2), a copy of which was faxed to Defendant at 8:44 pm (PTX 94 at 1-2) and subsequently appended to a copy of a term sheet Willumstad had not seen.(numbered text page 14, PDF page 28)

Yves here. The board let Willumstad sign what amounted to a blank check to the government? And the government, in a trial, is refusing to turn over the term sheet it provided to Willumstad? What kind of nonsense is this?

This deal was only a short term secured credit facility, to be taken out by a more buttoned-up credit agreement. To the extent there were actual agreed terms here, principal, interest and fees were due either on the demand of the NY Fed or September 23. Even though the board was in theory still in charge, Paulson unilaterally fired Willumstad on September 16 and along with the New York Fed, replaced him with Ed Liddy as chairman and CEO. It also started moving staff into AIG. Note the Fed Board of Governors has not authorized the New York Fed to take this step.

There was already a disconnect between the AIG and the government as to what this first deal was about. AIG issued press releases and an 8-K filing about the secured credit facility and described the 79.9% interest in the form of warrants. The Feds demanded that AIG issue a corrected 8-K and describe the equity position in unusually vague terms:

The summary of terms also provides for a 79.9% equity interest in AIG. The corporate approvals and formalities necessary to create this equity interest will depend upon its form.

When the board met the following weekend to approve the credit facility, much to its surprise, the Treasury and Fed presented terms that were substantially worse, and board had already regarded the initial deal as barely acceptable (emphasis original):

14.4 Even at the September 21 Board meeting, the AIG Board was not given a copy of the draft credit agreement


15.1 The form of equity was material to AIG

15.2 Defendant changed the form of equity from non-voting warrants to voting convertible preferred stock in order to obtain immediate control of AIG.

(a) “FRBNY considered whether it should seek equity in the form of warrants, but concluded that, among other shortcomings, this approach would not be consistent with all of its objectives because the warrants would not carry voting rights until exercised” (Def. Resp. to Pl. 2nd Interrogatories No. 2)…

15.4 Defendant changed the form of equity from non-voting warrants to voting convertible preferred stock to avoid the shareholder vote that would be required to issue warrants…


I don’t want to bog less technically oriented readers in details, but a major thread in the case was the machinations the Fed and Treasury went through to obtain a voting interest while circumventing shareholder approval. Among other things, that meant requiring AIG, which they effectively controlled as of September 16, to violate New York stock exchange rules.

Here is the hijacking section (emphasis original):


17.2 At the September 21, 2008 meeting, Liddy told the Board: “the Corporation will be required by the Bank and the Treasury Department to finalize the documentation and sign the Credit Agreement before the opening of the market the following day” (JX 103 at 2)…

17.4 Defendant threatened to cut off funding for AIG by calling its secured demand notes if the AIG Board did not approve the Credit Agreement as drafted by Defendant…


18.1 The AIG Board of Directors’ outside counsel, Rodgin Cohen of Sullivan & Cromwell LLP, advised the Board during the September 21, 2008 meeting that “bankruptcy was a considerably worse alternative now than it was previously,” (JX 103 at 6), and that “if the Board accepted the Bank transaction, the Board would have properly exercised its business judgment,” but that “if the Board chose to file for bankruptcy, he was not prepared to render a similar opinion to the Board” (JX 103 at 5-6). (See also Bollenbach (Dec. 4, 2013) Dep. 165:6-25.)

18.1. By contrast, during the September 16, 2008 AIG Board meeting, Cohen had advised the Board that it “could accept either option” of accepting the proposed credit facility or filing for bankruptcy “if the Board believed in good faith that that option was in the best interests of the constituencies to whom the Board now owes its duties” (JX 74 at 5).

AIG’s counsel, bank uber-lawyer Rodgin Cohen, has long been one of Goldman’s most important advisors, back to the day when I was an associate at Goldman. For instance, he represented Goldman on Sumitomo Bank’s acquisition of a special limited partnership interest in Goldman in 1986. Query how independent his advice to AIG could have been.

These corporate governance issues are over my pay grade, but the Treasury and Fed held a gun to the AIG board’s head on September 16 and September 21, in both cases leaving it with the option of only a bankruptcy filing. Cohen was willing to given board members an opinion that would have covered them in the unlikely event they had chosen to defy the government bear hug and file for bankruptcy on the 16th. He wasn’t on the 21st. What was different in the two fact sets to lead to a different conclusion?

The Fed and Treasury Allowed Non-Systemically Important Firms to Become Bank Holding Companies

The “Proposed Findings of Fact” document points out that GE, General Motors, and American Express all were permitted to take banking units they owned and turn them into bank holding companies in order to obtain access to bailout funds. Investment banks Goldman and Morgan Stanley were also allowed to form bank holding companies to facilitate the Fed support. Rodgin Cohen had asked the Fed if AIG could turn its thrift bank into a bank so as to also become a bank and get access to Fed lifelines. The answer was no.

And get a load of this:

Screen shot 2014-10-05 at 11.13.33 PM

As I said, there is more juicy material here. I strongly urge readers to dig in. I know this is only one side of a complicated picture. But given how much specific detail is marshaled in this AIG bailout trial filing, it is going to be interesting to see how the Paulson, Geithner and Bernanke justify the actions they took. Greenberg has always been seen as unlikely to win this case, but the government might find a victory to be more costly than it anticipated.

[281-1] 2014.08.22 Corrected Proposed Findings of Fact – Public Version

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  1. Sluggeaux

    Remember, let’s not let loathing for Mr. Greenberg cloud the fact that the Plaintiffs are a class which includes the shareholders of AIG. We have seen amateurish documents coming out of Treasury throughout the crisis. Wonder why the “term sheet” hasn’t been produced? The allegations (which I have not had time yet to fully digest) appear to be that our government was taken over by certain Wall Street personages in order to collect their gambling debts.

  2. fresno dan

    “I don’t want to bog less technically oriented readers in details, but a major thread in the case was the machinations the Fed and Treasury went through to obtain a voting interest while circumventing shareholder approval. Among other things, that meant requiring AIG, which they effectively controlled as of September 16, to violate New York stock exchange rules. ”

    A nation of laws, not men.
    For me, the last few years has been a real eye opener. Whether it was the MILLIONS of forged foreclosure documents, the purposeful lack of prosecution of financial crimes, or the general lawlessness – its all of the same thread.
    How many examples do we need that US laws are just a chimera, a cover for police and the wealthy to oppress the poor, but ignored when ever it is contrary to the interests of the rich or major campaign contributors???

    1. steelhead23

      I offer that the evidence on the record is more than sufficient for such a finding. So, with the government using its police powers to oppress even the mildest protests, the elite class in full control of government, and voter suppression and election fraud rampant, what are we to do? Open rebellion would be suicidal, so I suggest a quiet rebellion – create a dark economy, barter for goods, stop earning Federal Reserve Notes and start building community. In my honest opinion, this is a bigger mess than the Vietnam war and Watergate combined. Thank God for the internet and Yves Smith or we would all be treated as mushrooms.

  3. fresno dan

    Could anyone comment on what the legal rationale and theory is, that financial information in a court document going on 6 years old, cannot be disclosed to the public?
    Would anyone care to speculate about what was redacted or the reason why such information cannot be disclosed?

  4. TheCatSaid

    Amazing stuff. Words fail me.

    Thanks Yves for getting this out there. The summaries of selected sections plus your comments are most helpful.

  5. susan the other

    Treasury didn’t seem to even understand corporate law. They just strong-armed AIG into handing over 80% of its shares (later changed to preferred shares!) for an 85 bn infusion. We live in the wild west. The detail that interests me is the backtracking of Treasury on allowing AIG the option of bankruptcy and then reorganization with private investors. Treasury’s willingness to let Lehman go down “because they didn’t have the tools to save it” seems even more disingenuous now. The reasons for all of this have been omitted or redacted because this really should not be so puzzling. Treasury clearly doesn’t need no stinkin’ tools. So the decisions on both AIG and Lehman were tactical. Maybe they let Lehman fail because that subsequent mess could be contained but somehow AIG’s potential mess (derivatives) could not be. But that doesn’t really make sense either.

      1. redleg

        Do you really think that the deciders at this altitude give a f#@% about pension funds, excepting of course what they could extract from them?

      2. Yves Smith Post author

        No, pension funds didn’t buy credit default swaps or synthetic CDOs (CDOs made of credit default swaps). They did have exposures to residential mortgage backed bonds. And Treasury has never demonstrated any concern about pension funds. Their worry was about the banks and investment banks.

        1. vlade

          IIRC, the only time Treasury intervened on real-money side, it was when MM funds threatened to break the buck, which would have killed the liquidity for US banks (well, not breaking the buck, but the expected run on the funds that would follow). But then, one can see MM funds as US banks’ outsourced liquidity providers so really a part of that system.

    1. steelhead23

      I believe the reason AIG was “saved” was its role in propping up the house of cards. That is, when collateral is leveraged at 50 or 100 to 1, traded as money-good among the players, a bankruptcy of AIG would have played absolute havoc on the TBTF banks. Perhaps the government had a role to play here, but it wildly overplayed its hand. The troika wanted to nip the problem in the bud – to prevent the cascade of defaults before it started out of both fear (a collapse of AIG would very likely have created one hell of a mess), and an overweening fealty to the big banks. Remember, in the silly system the U.S. government currently employs for financing, these banks are the “primary dealers” in government securities. While I believe that reconstructing this system using MMT and government-issued currency is well overdue, those who believe in the efficacy of the current system (hell, they’re all rich because of it) and fear the scrutiny of that system collapse would cause, openly broke the law to keep it from collapsing. I am quite certain that Geithner, Paulson, and Bernanke still think they did the right thing – even if it was illegal. In their minds, the alternative was unthinkable.

  6. indio007

    Obviously the goons working ostensibly for Treasury wanted to take control of AIG by any means.
    Why was this one company targeted for take over?
    I find them moving personnel all over the place highly suspicious.
    What is buried in the corporation that they want so bad?

    Which makes me wonder, Is the US subject to Anti-trust laws?

    1. dejavuagain

      Geithner wanted AIG so that he could funnel taxpayer money to Goldman and other counterparties. That was the whole point. And, he may have figured that Greenberg was so disliked by many that he could get away with the scam. So, Geithner saved Goldman and then payed unwarranted bonuses seemingly to try to cover up his scam, an equally odious act. The sanctity of contract.

      1. curlydan

        I always thought the bonuses served the purpose of steering eyes away from the $85B, but I guess it could have been a dual purpose. The nation was temporarily frothing at the mouth about $300M in exec bonuses while $85B was moved to the investment banks. Kind of a great magic trick, making the public look at a less significant detail in one hand while the “big act” was occurring in the other hand.

      2. Fiver

        Saw Geithner on either John Stewart or Colbert a couple months back peddling his book. His response to everything was a goofy, highish cackling laugh that made his face contort to reveal the 100% little weasel of a man at the NYFed: a high flyer, a reputation for following orders, but also f-ing up, but not an ounce of respect to be had anywhere inside the US with the adult population that reads the news.

  7. grayslady

    The footnotes make for as much incredible reading as the body of the pleading. For example,

    (a) Wachtell, Lipton, Rosen & Katz (“Wachtell”) provided legal services to Treasury relating to AIG, including assisting Treasury in drafting the terms of Defendant’s loan to AIG, beginning on or around September 14, 2008 through September 19-20, 2008. The United States never memorialized its retention of Wachtell for services rendered to AIG, and Wachtell never sought compensation for such services rendered. See Wachtell 30(b)(6) (Murphy) Dep. 7:9-23, 23:7-24:17, 26:2-15; Def. Resp. to 3rd Interrogatories No. 25; PTX 98 at 3; JX 85 at 1; PTX 134 at 1; PTX 167 at 1, 3-7.
    (b) In September 2008, Wachtell represented Morgan Stanley in its successful efforts to become approved by the Federal Reserve as a bank holding company (PTX 187 at 1-2).

    Pity AIG didn’t have the foresight to hire Wachtell. Then maybe it, too, could have become a bank holding company.

  8. Rob King

    I suspect that the litigation currently in the Court of Federal Claims re Fannie & Freddie will offer similarly salacious reading material.

  9. TheCatSaid

    I wonder what Bill Black will say about this.

    What possible recourse is there when contracts have been made that are blatantly illegal?
    Can stockholders complain? Is there any point? Could this grounds for a RICO case? Are there any judges who would hear cases like this who have not been compromised?

    I think we need to object even if it’s not clear what could come from it.

  10. downunderer

    I hesitate to interrupt the flow of expert commentary on this clearly very weighty matter with a note that may look trivial or disrespectful. But maybe it is not so irrelevent after all to point to a book I just finished rereading last night (first time in maybe 20 years): British science fiction great John Brunner’s “Shockwave Rider”.

    I noted while going back over the rest of Brunner’s oevre that he showed a remarkable insight into the American sociopolitical scene, easier to notice now that so much of what he used as story background looks quite reasonable or even prophetic, though it seemed to me more like a foreigner’s misunderstanding when first published. Several of his books are freshly decorated with numerous little note tags.

    Shockwave Rider’s computer-whiz and all-round genius protagonist observes near the climax of a battle between his good-guy friends and the US government:
    “There was exactly one power base available to sustain the old style of government,” Nick grunted, “Organized crime”.

    Somehow this has changed from looking very strange to me in 1975 to looking like a serious possibility in 2014. I wish Brunner were still alive and writing today.

  11. skippy

    Sorkin revisionist part dux NYT dealb%k seems…. akin to a rape counseling session.

    skippy… drink spiked methinks…..

  12. OregonJon

    As I recall when the Fed carved up AIG there was no one in the room from AIG, but there was a representative from Goldman Sachs. In addition, and seemingly outside the purview of this suit, the fact that Paulson came directly from GS to be the Secretary of the Treasurty and with a GS director appointed to become AIG’s CEO makes for a large steaming pile of conflicted interest.

    Liddy’s “qualifications” was that he’d been the CEO of Allstate and therefore “knew” insurance, yet there were no similarities between the business done by Allstate and the complexities of AIG. Liddy was not sent to run AIG, but to liquidate same, and at fire sale prices which come in the midst of a crisis. But even if true, these are not a part of this lawsuit.

    Willumstad, who twice had been passed over when a candidate for Citibank’s CEO, was a weakling. Had he been stronger it would have been simple to tell Paulson and Fed to got to Hell, that he’d take AIG into Chapter 11 before he’d agree to the offered terms. Treasury and the Fed could not have allowed a Chapter 11 filing and different terms would have been forthcoming. Instead, Weak Willy folded when the first fang was bared. Little wonder that AIG was not in the room when its fate was sealed.

    That said, the happenings in 2008 were not the final word on AIG’s problems. The initial bailout plus a revision or two would have been sufficient had it not been for AIG’s doubling down on mortgage securities through the security lending program where by the insurance subsidiaries swapped investment grade bonds for mortgage CDO’s, just to gain a few hundred basis points in yield.

    That debacle, about equal in size to AIG FInancial Product’s idiocies, effectively bankrupted the life companies. AIG might have obtained foreign funding for AIGFP’s foibles, but would they have tossed another $80 billion dollars into the kitty? We don’t know the answer to that, but who in AIG’s post-Greenberg leadership team would have commanded such confidence?

  13. Fiver

    I have never wavered in my belief that the correct direction of policy would’ve encompassed closing down markets, force full disclosure of all problematic positions, etc, and take the time needed to manage the mess in an atmosphere of seriousness far short of panic. The Feds should’ve taken a two-by-four into the first meetings and laid on the lumber, the better to get the undivided attention of these ‘moguls’. No political mistake ever will match the failure of the Obama Admin to take decisive, winning action against this Mob.

    1. TedWa

      “No political mistake ever will match the failure of the Obama Admin to take decisive, winning action against this Mob.” It wasn’t a failure, it was his choice. I saw a PBS special on the bailouts where, in 2007, McCain decided to go back to Washington to help with the bailout negotiations. Naturally Obama followed. At the meetings with GW Obama stated that he didn’t want to inherit a great depression (Mccain winced) and that the banks needed to be bailed out with absolutely no strings attached. Even GW wanted strings attached, but since since he was a lame duck he bowed to the next administration and what he wanted. Obama then went out and whipped for the bailouts without strings attached. So it wasn’t and isn’t a “failure”, it was exactly what he wanted. I’d provide a link but when I’ve tried to locate that segment of the PBS special I haven’t been able to find it. Maybe it was deleted per Obama orders? I don’t know. But I know it was there and it was shocking.

      1. Fiver

        Of course it was a ‘choice’. What greater failure is there than to choose to bow to the extortion of the country one was chosen to lead when the entire population ached to see at last the courage to fight for the interests of the people, not the psychopathic ghouls that infest the Washington/Wall Street/Security Complex.

  14. chas

    Read the whole thing – couldn’t put it down. Seems to me it reappraises the whole bailout. Seems like a winner to me.

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