Six years later the tumult of the 2008 financial crisis remains in the news, with renewed consideration of the Lehman and AIG sagas and of the federal government’s reaction to each. The financial panic generated by Lehman’s bankruptcy early on Monday September 15th, after being left to fend for itself by the federal government (including the Federal Reserve Bank of New York, the Federal Reserve Board of Governors and the Treasury Department), led to an opposite tack with AIG just 36 hours later. Their differing outcomes continue to fuel passionate arguments, both in public policy and in courtrooms, with larger narratives sometimes swallowing the actual facts.
As Hank Greenberg, former CEO and significant shareholder of AIG, presses forward with his lawsuit against the federal government and the trial now underway, there’s a meaningful fact missing from public discussion of AIG. Greenberg’s lawsuit alleges, as he has since the 2008 AIG rescue, that the federal government imposed unduly harsh financial terms on AIG, unfairly draining value from AIG’s shareholders in a moment of government overreach.
As Special Counsel to the New York State Superintendent of Insurance, I was involved in the dramatic events over those four days in September 2008, working with New York State Insurance Superintendent Eric Dinallo and a group of fellow senior staff from the New York State Insurance Department. (My prior professional experience included 13 years in private practice primarily doing commercial financing, with many workouts in that time.) I was at AIG that Saturday, Sunday and Monday and at the Federal Reserve Bank of New York that Monday and Tuesday, departing from the New York Fed only after a $14 billion wire was sent Tuesday night.
The terms on which the Federal Reserve Bank of New York provided it’s extraordinary $85 billion financing were quite expensive, with a very high interest rate and fees and the federal government receiving 79% of AIG’s equity. As a policy matter it stands in stark, and positive, contrast to underpriced TARP bank loans and other federal government actions which saved many major banks at a modest cost to their shareholders. As a factual matter, it’s important to understand that the structure of the AIG financing terms was not created by the government, but by commercial bankers who were attempting to secure commercial financing for AIG.
As late as Monday evening there was desperate hope that commercial financing could be quickly raised, and proposed terms were devised. As is the case in virtually all arms-length financing provided to ailing businesses, the terms were quite steep with most of the benefit intended for the new lenders/investors. With the financial markets moving into a full-fledged panic and banks desperately seeking liquidity there was no financing available from commercial lenders, even at that steep price, however. Early Tuesday morning the federal government moved to act in place of the hoped-for but nonexistent commercial lenders, providing billions of dollars that day to stem the contagion coursing through financial markets worldwide. An initial, and smart, decision was to use the terms, documents and lawyers already underway. Doing otherwise would have made a herculean challenge impossible. Providing any bank financing is an involved process and a large commercial bank loan typically takes weeks or months to complete; making billions of dollars of bank loans in a single day is not remotely possible in the commercial world.
The circumstances of the New York Fed’s financing don’t change the fact that the terms were steep, nor the fact that the initial $85 billion facility was expanded and restructured several times in the next six months with a reduction of the interest rate and other terms and the addition of Treasury TARP financing. Those circumstances do, however, help inform an accurate understanding of why those terms were imposed and why they should be viewed as sensibly benefitting the ultimate source of that financing: American taxpayers.
~ John Kenny