STOCK MARKET WATCH -- Wednesday, 19 November 2014

[Demeter]

14. Greenberg Absent from AIG Trial, But Government Uses His Words

http://blogs.wsj.com/moneybeat/2014/11/18/greenberg-absent-from-aig-trial-but-government-uses-his-words/?mod=yahoo_hs

Maurice R. “Hank” Greenberg wasn’t in court today–but his words were.

Howard Smith, a former chief financial officer of American International Group Inc. and long-time confidante of Mr. Greenberg, took the stand Tuesday morning as a government witness in the trial for the lawsuit brought by Mr. Greenberg...Mr. Greenberg, who built AIG into a global financial-services powerhouse over nearly four decades, is challenging the lawfulness of the harsh terms of the insurer’s 2008 government bailout. Both he and Mr. Smith departed the company in 2005 and were large shareholders at the time of the bailout. The 89-year-old Mr. Greenberg is now building another insurance and investment conglomerate, Starr Cos. Mr. Smith is vice chairman of finance at one of Starr’s main entities.

In calling Mr. Smith to testify Tuesday, the government appeared to be seeking to use his and Mr. Greenberg’s past words to bolster its case that AIG made especially risky moves that got it into trouble. The government cited numerous emails, memos and other communications in 2008 in which the pair mentioned their concern about risky practices at AIG. Mr. Smith, for instance, agreed that he recalled a statement by Mr. Greenberg that AIG management was basically moving the deck chairs around the Titanic. The testimony was aimed at refuting a key part of the case that has been made by Mr. Greenberg’s legal team: that AIG’s liquidity crisis was caused by the same market forces that hit other financial institutions in 2008, yet banks got relatively generous loan terms while AIG became a political scapegoat.

The government asserts that AIG made risky moves such as selling a type of bond insurance known as credit-default swaps that left the company exposed to huge collateral calls, as well as making risky investments in subprime-mortgage bonds. Among documents cited by Justice Department lawyer Kenneth Dintzer was a memo from Mr. Smith to Mr. Greenberg in summer 2008 that referenced an AIG financial filing to the Securities and Exchange Commission and included this comment from Mr. Smith: “It appears that their procedures to mitigate risk in the credit default swaps were a colossal failure!”

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Mr. Greenberg was on the witness list for the trial, but last Friday evening the government informed his legal team, led by David Boies, that he wouldn’t be called this week. The government is seeking to wrap up its presentation of witnesses by Friday. The trial is now in its eighth week. The AIG-bailout lawsuit accuses the government of overstepping its authority in demanding its 79.9% equity stake in exchange for providing an $85 billion emergency loan. Mr. Greenberg asserts the government impeded AIG’s efforts to obtain private-sector help as the crisis reached its peak and coerced its board into accepting the bailout. He argues the government then used its control of AIG to funnel money to the company’s Wall Street and overseas bank counterparties, fully repaying them in a “backdoor bailout” rather than negotiating concessions. The government maintains AIG’s board voluntarily adopted the bailout package to avoid a bankruptcy filing.