Lawyers for plaintiff Hank Greenberg have been billing their case against the US government as nothing short of a public service. Maybe so, but not in the way they think.
They’re trying to prove that a trio of regulators set out to crush shareholders of American International Group, including feisty former chief Greenberg, in order to throw a lifeline to their buddies at Goldman Sachs and the other big banks.
But the real public service will be to show our nation’s “smartest” watchdogs had almost no clue that a tsunami was about to hit the banking system in 2008 until nearly the minute it began to destroy almost every major financial institution.
Oh, and six years later, we’re relying on pretty much the same types to protect us.
It’s hard to say how much of this will come out this week, as the trio of regulators — former Federal Reserve chief Ben Bernanke, former New York Fed boss Tim Geithner and former Treasury Secretary Hank Paulson — testify before the federal judge hearing the case.
Naturally, none of them wants to ’fess up. Both Geithner (who went on to become President Obama’s treasury secretary) and Paulson have written logic-defying, self-serving books to show how deft they were in handling the crisis, while Bernanke plans one of his own.
In court, all will do their best to say nothing.
On Monday, Paulson did little more than concede the obvious: The bailout conditions the government imposed on AIG were “harsher” than those imposed on the big banks, but letting AIG fail would’ve been “catastrophic.”
Geithner and Bernanke, equally lawyered up, will dish much of the same.
But they’ve already spilled the beans about their manifold failures in documents they fought not to be made public: heir sealed depositions, under questioning by Greenberg’s legal team, led by David Boies, ahead of the trial.
I’ve been lucky enough to review what Geithner, Bernanke and Paulson said under oath during hours of questioning. The depositions run thousands of pages, with tons of legalese and mind-numbing explanations of basic economics.
But at times they seemed to let down their guards, and the ugly truth came to light. In the depositions, Bernanke and Geithner — the two regulators with the most oversight responsibilities — come across as having been clueless amid the unfolding crisis.
At one point, Bernanke makes the astonishing statement that he “did not think that Morgan Stanley, to my recollection, was on the verge of failure” in September 2008 — a time when everyone in the financial world, including the folks at Morgan, knew the firm was on death’s door.
Geithner comes across as somewhat less clueless. Still, it seems he didn’t realize then that AIG was no ordinary insurer — which everyone on Wall Street except for him appears to have known at the time.
After Greenberg’s ouster in 2005, new AIG management went on an unparalleled risk-taking spree, insuring loads of toxic debt held by the banks. Which by 2008 meant that if AIG couldn’t make good on its obligations when the toxicity of that debt became obvious, the whole banking system would become insolvent.
Yet, in one of his more telling exchanges with Greenberg’s lawyers, Geithner readily admits that he personally “did not spend time . . . looking at AIG,” until the weekend in September 2008 when Lehman Bros. imploded, the spark that started the wider crisis.
This, when his deposition shows he’d met personally with AIG’s then-CEO three times through the summer and fall of 2008 and discussed AIG’s increasingly fragile condition.
Greenberg’s lawyers may in the end convince what appears to be a friendly judge that the terms of the AIG bailout amounted to an illegal “taking” of shareholder value. (Uncle Sam demanded nearly all of AIG’s equity in exchange for the bailout — a harsher deal than the banks got.)
But even Greenberg will tell you the case is ultimately headed to the Supreme Court.
But the bigger, and scarier, picture is this: It’s not just that Paulson, Geithner and Bernanke were in way over their heads back in 2008. It’s that their successors are probably even more clueless today.
After all, these are men and women who want to work with the very firms that they’re regulating — only now they have to watch banks that are bigger and quite possibly even more dangerous.
And the same type of people who got us into the last mess are in charge of making sure we don’t go that route again.
Charles Gasparino is a Fox Business Network senior correspondent.
