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Hank Greenberg may have a case after all.

The former CEO of AIG, and major pre-bailout shareholder through the AIG executive enrichment vehicle, C.V. Starr, is hardly a sympathetic figure. The idea of a billionaire suing the government for saving the company that he formerly led from bankruptcy hardly seems like a winning cause.

But in this beauty contest between Cinderella’s ugly sisters, in this case Greenberg versus the defendants, which is nominally the US government but in a political sense is the team that led the AIG bailout, Hank Paulson, Timothy Geithner, Ben Bernanke, and their chief lieutenants, Greenberg may well come out looking better.

We base our view on a reading of the “Corrected Plaintiff’s Proposed Findings of Fact,” filed in Federal Court on August 22. We attach this document at the end of this post. Note that this record includes extracts from the depositions of Paulson, Geithner, and Bernanke, which were sealed by the court, meaning it contains information otherwise not available to the public. As we will also show in the second post in this series, even this document has a section which has been redacted.

It is important to keep in mind that this is the Hank Greenberg version of the story, as presented by his attorneys, Boies, Schiller & Flexner, and Skadden Arps. But the flip side is that the narrative on what happened when AIG was about to go under was written by the victors, above all, the Paulson-Geithner-Bernaked troika, repeatedly lauded in the media for saving the financial system. Even now, with the economy languishing with high unemployment (when discouraged workers are included in the tally) and low trendline growth, the official narrative, that saving the system was paramount, and certain casualties were unfortunate but necessary, is far more widely accepted than it should be. It’s clear that the rescues were designed to favor the banks, and pretty much everyone else was sacrificed for their benefit. Nevertheless, it’s an odd spectacle to see a self-styled and perhaps actual victim, a grasping, tenacious billionaire, unearth new information about whose interests were really served by how the bailouts were structured and carried out.

The authorized version of what happened in the rescues is Andrew Ross Sorkin’s Too Big to Fail. Much of his book focuses on the Lehman unravelling, with Dick Fuld as a hyperaggressive CEO who blew some possible rescues because he refused to believe that Lehman would not be bailed out and thus overplayed his hand in negotiations with his best shot at deliverance, the Korean Development Bank. Sorkin gives the AIG rescue short shrift, but makes sure to present AIG CEO Robert Willumstad as an idiot who doesn’t have a handle on his company’s yawning black hole. By contrast, the various officials and the bankers rounded up to work on the financial salvage operations are depicted sympathetically. Pace Sorkin, if they are guilty of anything, it’s of well meaning errors in judgment.

The Starr filing gives quite another picture. It argues that AIG was forced to take a bailout it didn’t need, that all that was required was a bridge loan until it could obtain private financing. That may sound like a howler. AIG was teetering on the verge of failure and needed to get a $14 billion bridge loan on September 16 (a Tuesday, the day after the Lehman bankruptcy) that in a few days rose to $37 billion simply to carry it through the weekend when the terms of the credit facility were finalized.

The Too Big to Fail account is consistent with the “are you kidding?” reading. It has Jamie Dimon giving the orders to his world-leading syndicated lending team, led by industry legend Jimmy Lee, to wheel into action to find big bucks for AIG. Dimon also tells his stunned subordinate Doug Braunstein that Goldman is co-leading the syndication. Braunstein sputters that Goldman as major AIG counterparty has a huge conflict. Dimon tells him to shut up.

The Too Big to Fail account has some chaotic meetings, with Goldman clearly too preoccupied with its payout on an AIG rescue and too confident that its credit default swaps on AIG are money good. But like most other accounts to date, it makes it sound as if rounding up enough private capital for AIG was a non-starter. The punch line:

Lee’s brain was starting to do the math. “Who’s going to buy this shit?” he asked out loud to no on in particular.

Contrast that picture of the AIG bailout with the Starr account (emphasis original):

7.6 Defendant directly discouraged sovereign wealth funds from providing liquidity to AIG. (a) Sovereign wealth funds, including the Government of Singapore Investment Corporation (GIC) and the Chinese Investment Corporation (CIC) expressed interest in investing in AIG (Studzinski Dep. 39:4-40:18, 133:11-19). (b) Defendant discouraged the CIC and representatives of the Chinese Government from assisting AIG. At 12:25 p.m. on September 16, 2008, Taiya Smith, Paulson’s deputy chief of staff and executive secretary, informed Paulson’s chief of staff and Treasury Under Secretary for International Affairs David McCormick that the CIC was “prepared to make a big investment in AIG, but would need Hank to call [Chinese Vice Premier] Wang Qishan” (PTX 89 at 1; see also PTX 423 at 15-18). The Chinese “were actually willing to put up a little bit more than the total amount of money required for AIG” (PTX 423 at 16). (c) On September 16, 2008, McCormick spoke to Paulson about the Chinese interest in investing AIG (PTX 423 at 16-17). McCormick then told Smith that Treasury “did not want the Chinese coming in at this point in time on AIG” (PTX 423 at 17). (d) Later that day, Smith met with Chinese Government officials in California during Joint Commission on Commerce and Trade in Yorba Linda, California (PTX 423 at 16). During that meeting, “all [the Chinese officials] wanted to talk about was AIG” (PTX 423 at 17). Smith spent one or two hours explaining what was happening with AIG (PTX 423 at 18). She conveyed the message that Treasury did not want the Chinese to invest in AIG (PTX 423 at 17). (e) On September 17, 2008, United States Senator Hillary Clinton called Paulson “on behalf of Mickey Kantor, who had served as Commerce secretary in the Clinton administration and now represented a group of Middle Eastern investors. These investors, Hillary said, wanted to buy AIG. ‘Maybe the government doesn’t have to do anything,’ she said” (PTX 706 at 279). Paulson told Senator Clinton, “this was impossible unless the investors had a big balance sheet and the wherewithal to guarantee all of AIG’s liabilities” (PTX 706 at 279). (numbered text page 17, PDF page 21)

The fact that the Singapore and Chinese sovereign wealth funds both were willing to invest in AIG, and that a separate group of Middle Eastern investors was also pressing to buy in, strongly undercuts the official story that the only way out for AIG was into the Fed’s arms. Yes, we don’t know exactly how much they were willing to put in and whether that would have been enough to make up the $85 billion size of the initial credit line.

But the Chinese statement was a clear general indication that “we’re willing and able to go big”. And it turns out big was pretty big:

(a) On September 26, 2008, Treasury contractor Dan Jester received a copy of an email sent by Blackstone’s John Studzinski to Liddy and AIG executive Brian Schreiber stating that “China. Inc this morning is interested in buying: AIA, ALICO, ILFC and certain Real Estate. They are talking about writing a check of about $50 billion.” Studzinski also Case 1:11-cv-00779-TCW Document 281-1 Filed 08/22/14 Page 66 of 99

wrote that “We need to have Paulson call Vice Premier Wang Qishan. The Chinese will then move ahead quickly” (PTX 253 at 1-2). (numbered text pages 62-63., PDF pages 66-67)

Now of course, one can argue the Chinese were trying to cherry-pick the best assets, rather than invest in AIG overall. Nevertheless, the Chinese bid should have been treated as an initial offer. And that’s before you factor in what Treasury knew and the Chinese didn’t: that other heavyweight foreign investors were also eager for the chance to buy into AIG at what they thought was a distressed price.

Now one can argue there were reasons to turn down these offers. Having the Chinese, or consortium dominated by foreigners, could prove to be ugly. The US, after all, had just put Fannie and Freddie in conservatorship in large measure to reassure the Chinese and Japanese, who were large investors in Freddie and Fannie guaranteed paper, that they would not suffer losses. What if the Chinese government rescued AIG and the black hole turned out to be bigger than anyone though it was?

A colleague, who joined AIG right before Greenberg was forced out as the executive in charge of a $100 billion operation in Asia, told me that the entire company had revolved around Greenberg personally, including not just decision-making, but knowledge of the financials. He gave the strong impression that AIG had seriously deficient controls on multiple levels: “It’s as if we are in a car that is moving forward even though the axles have been pulled out. We are waiting for the wheels to fall off.”

There is also the not-trivial issue that AIG is widely believed to provide legitimate-looking jobs to CIA assets all over the world. Would letting foreigners obtain control put that sort of information at risk?

However, concerns about foreign ownership, or undue risk of the Chinese later getting a case of buyer’s regret could then lead to more international tension, could have been handled by having a broad consortium of foreign buyers plus US investors. And having brand-name offshore institutions already in for a big portion of a total fundraising would make rounding up the US component vastly easier.

To put it simply: this much foreign interest, from so many sources, BEFORE Jimmy Lee had started making calls (certainly the Chinese and Singapore offers came in before that; the Middle Eastern offers came through Kantor, and thus did not result from the JP Morgan/Goldman fundraising effort) suggests this deal could have gotten done. Confirmation comes from this testimony:

(d) KKR’s Derrick Maughan provided sworn testimony that if “AIG, the company, or the Fed as lender of last resort, had wished they could have stabilized the company through Government invention support [sic], and then introduced private capital” (Maughan Dep. 73:4-18). (e) In contrast to Defendant’s refusal to facilitate AIG’s attempts to raise liquidity from the private sector, Defendant provided assistance under section 13(3) to “facilitate the merger” between JP Morgan and Bear Stearns in March 2008 (PTX 709 at 156). (numbered text page 16, PDF page 20)

Now of course, as many readers have surmised, there are other explanations that seem more plausible for Paulson’s quick rebuffs, namely, that the Fed and Treasury had a a rough idea of an AIG bailout plan in mind and were past the point where they were willing to consider alternatives. Or alternatively, that there were key but unstated design parameters in an AIG rescue, and letting foreign investors in would have interfered with them.

AIG’s contention is that the driver of how its rescue was done was to force as many RMBS and CDO credit losses on AIG, so as to reduce the amount of support that would have to go directly to banks. In other words, it was to facilitate the bailout of the investment banks and banks that were perceived to be essential due to operating the payments system and large domestic and international over-the-counter debt markets. AIG could be handled more roughly because it was not a critical part of the financial plumbing and also had never done much to curry political favor. By contrast, if foreign investors were part of the rescue team, they would almost certainly have insisted on haircuts on the AIG credit default swaps, a large mechanism for laundering bailout dollars through AIG to banks and former investment banks like Goldman and Morgan Stanley.

Our second post in the series looks at the Starr allegations of how the AIG bailout was handled. As hard as you may find it to believe, the filing marshals strong evidence that AIG was stolen from shareholders. It’s going to be interesting to see how the government responds to this account, and in particular, Goldman’s troublingly central role.

One last tidbit: notice how Hillary Clinton appeared to be doing a peculiar favor for a Republican administration? Mickey Kantor, who was fronting for the Middle Eastern investors, is a long-standing Clinton ally and a continuing major fundraiser for the Clintons. The fact that he was representing investors meant he was looking to broker a deal to get a fee. For a presumed multi-billion dollar investment at the level of fees JP Morgan was hoping to charge (5%), that could easily represent a nine-figure payday. One has to wonder whether if his firm, Mayer Brown, had landed such a big fee would have thanked Hillary Clinton for her help, say by writing a large check to the Clinton Foundation or throwing its muscle behind Hillary’s future campaigns.

281-1-2014.08.22-Corrected-Proposed-Findings-of-Fact-Public-Version

[281-1] 2014.08.22 Corrected Proposed Findings of Fact – Public Version