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U.S. Judge Orders Bernanke to Testify in AIG/MBS Bailout Case

Robert Ottone
Jul 31, 2013

Beginning in September 2008, the U.S. government let Lehman Brothers file for bankruptcy. Not long after that, the U.S. Department of the Treasury stepped in to save American International Group (AIG). AIG had essentially, crippled itself by not delivering on mortgage-backed securities (MBS) and various other contracts. Two years later, AIG began unloading assets to companies like MetLife, reportedly using the majority of the money accrued from these kinds of sales to pay back government loans. In January 2011, AIG used its line of credit with the Treasury to pay off Federal Reserve loans. In essence, borrowing from Peter to pay Paul. Since then, former AIG CEO Hank Greenberg has begun a lawsuit against the U.S. government over the bailout received that has supposedly been paid off in full. Federal Reserve Chairman Ben Bernanke has been ordered by U.S. Judge Thomas Wheeler to appear before court in order to be questioned. "The court cannot fathom having to decide this multibillion-dollar claim without the testimony of such a key government decision-maker," Wheeler said. "These facts constitute 'extraordinary circumstances' for the taking of Mr. Bernanke's deposition." The lawsuit is centered around the government taking a 79.9 percent stake in the company, while Greenberg’s company, Starr International, was once holder of 12 percent. In 2009, a reverse stock split of 1-20 in AIG occurred, impacting the remaining holdings of Starr International and other companies. Greenberg has attempted to bring AIG into the case formally, however; AIG has yet to join. Greenberg is seeking at least $25 billion. "Because of Mr. Bernanke's personal involvement in the decision-making process to bail out AIG, it is improbable that Plaintiff would be able to obtain the same testimony or evidence from other persons or sources," Wheeler wrote in the court order. The government has stated that the allegations are without grounds and that AIG’s only course other than receiving federal aid was bankruptcy. Shareholders then would have been left with worthless stock. Since the bailout, AIG has been accused of poor business practices and has been cast in a negative light after handing over millions in bonuses to their executive leadership. After some controversy and after naming a new CEO, AIG has since restructured and begun focusing on their core insurance writing business. The New York Fed paid around $114 billion of AIG’s bailout, while the Troubled Asset Relief Program (TARP) paid off the remainder of $68 billion.
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