(Bloomberg) — The failure in 2008 of American InternationalGroup Inc., the world's biggest insurer, would have caused “masspanic on a global scale,” Timothy Geithner, the head of the FederalReserve Bank of New York at the time, testified at a trial over thegovernment bailout of the company.

Geithner, one of three architects of the U.S. response to the2008 financial crisis, testified in response to claims by Maurice“Hank” Greenberg's Starr International Co. that the governmentillegally took equity in AIG. Geithner was responsible for settingwhat a Starr lawyer called “an extortion rate” of 14% on an $85billion loan to AIG.

In contrast with his predecessor at treasury, Henry Paulson, whotestified yesterday and finished well ahead of schedule with short,direct answers, such as “you betcha,” Geithner has so far been morecautious, frequently telling Starr's lawyer David Boies that hedidn't remember details of AIG's rescue effort.

When asked by Starr's Boies how much financial help AIG receivedas the fiscal and credit situation in the U.S. worsened in 2008,Geithner responded: “I don't carry those numbers around in myhead.”

Several copies of Geithner's book, “Stress Test,” some withpages marked with Post-it notes, lay on the plaintiff and defensetables, fodder for questioning ahead. Boies used a similar tacticyesterday, focusing on key pages in Paulson's book, “On the Brink,”in questioning the former treasury secretary. Ben Bernanke, theformer chairman of the Federal Reserve, is scheduled to take thestand tomorrow.

Send Message

Paulson testified that regulators wanted to send a message tomarkets that government help would cost them.

“It was important that terms be harsh because I take moralhazard seriously,” Paulson said yesterday in federal court inWashington, referring to the economic term for consequence-freerisk-taking.

Starr, AIG's largest shareholder at the time of the bailout,claims the government punished the insurer by demanding equity andimposing a far higher interest rate than other bailout recipients,such as banks, had to pay. Starr, whose chief executive officerGreenberg led AIG for almost 40 years, is seeking at least $25billion in damages for shareholders.

The case is being heard by U.S. Court of Federal Claims JudgeThomas Wheeler without a jury.

The case is Starr International Co. v. U.S., 11-cv-00779, U.S.Court of Federal Claims (Washington).

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