AIG Lawsuit: Paulson Takes The Stand, Said Bailout Terms 'Harsh' But 'Appropriate'

Former Treasury Secretary Henry Paulson said AIG's bailout terms were harsh but fair during testimony Monday in the insurance giant's $40 billion lawsuit, the Wall Street Journal reported. Former AIG Chairman Maurice Greenberg sued the federal government over the terms of the bailout, saying it cost shareholders billions.

Paulson spent two hours of his testimony discussing the bailout terms and whether private sector options were ignored by the government. The bailout terms were a 79.9 percent ownership of AIG by the government and an $85 billion loan, ultimately ballooning to $184.6 billion, with a 12 percent annual interest rate. AIG paid off the loan in 2012.

"I certainly believe it was treated in harsher terms than a number of others," Paulson said, adding, "I have a reason why I think that was appropriate." Paulson said the insurance giant's treatment was different from other companies, such as Morgan Stanley or Goldman Sachs Group Inc., due to circumstance rather than a need to punish or provide more favorable terms to one company over another.

"If we have a rescue that trumps failure and prevents failure, then it was important that the terms be harsh here. I look at moral hazard very seriously," Paulson said. Moral hazard is an economic theory stating that companies or parties would engage in risky behavior because they would not have to face the consequences. Paulson said the terms were in part a reaction to the political and public opinion of Wall Street and the banks, and were necessary to quell criticism.

AIG "certainly was a scapegoat for Wall Street and all the bad practices that people were angry about," Paulson said.

Andrew Ross Sorkin, editor of the New York Times' DealBook and author of "Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System -- and Themselves," which examined the collapse of Lehman Brothers, said Greenberg's lawsuit is an attempt "to rewrite history so that AIG can be viewed as a sympathetic casualty of the crisis and one that was mistreated by the big bad government." Sorkin said the bailout was necessary to rescue Wall Street.

Timothy Geithner, former president of the Federal Reserve Bank of New York and later Paulson's successor, is expected to testify Tuesday.