(Bloomberg) -- The Federal Reserve Bank of New York pouredbillions of dollars into rescuing American International Group Inc.in September 2008 without drawing up documents that would cementthe government’s control of the giant insurer, the bank’s lawyertestified.

AIG’s dire condition required an immediate infusion of cash, andpaperwork memorializing the terms of the loan wasn’t complete,Thomas Baxter, the New York Fed’s general counsel, told a judge inWashington today in a trial over a shareholder challenge to theterms of the rescue.

The Fed wanted to quickly get control of AIG because of concernthat Rodgin Cohen, an attorney for the company, might try tore-negotiate the rescue terms, Baxter said. Cohen had succeeded inre-working the terms of JPMorgan & Chase Co.’s takeover of BearStearns and the Fed was worried that he might try again with AIG,Baxter testified.

“The more credit we put into AIG, the less bargaining power wehad,” Baxter said.

Maurice “Hank” Greenberg’s Starr International Co., the biggestshareholder in AIG when the financial crisis struck, sued the U.S.in 2011 seeking more than $25 billion for losses from the insurer’sbailout. Starr claims the assumption of 80% of AIG’s stock inexchange for an $85 billion loan was an unconstitutional “taking”of private property because the Federal Reserve Board of Governorslacked the legal authority to take equity in a company inconsideration of a loan.

14 Percent

AIG also was charged 14% interest, more than three times higherthan other financial institutions seeking assistance from the Fedduring the financial crisis, according to the complaint.

Documents introduced during Baxter’s testimony today showed thatan aborted private bailout of AIG led by investment banks includingGoldman Sachs Group Inc. and JPMorgan Chase & Co. contemplatedan interest rate of a minimum of 10%.

The term sheet signed by AIG as part of the deal put theinterest rate at at least 12%, according to documents in thecase.

Baxter testified that Timothy Geithner, then head of the NewYork Fed, made the decision to increase the cost of the loan.

A high rate was needed in part to offset the risk that stock inAIG insurance units pledged as collateral would lose value if theparent company didn’t regain its footing, Baxter told thecourt.

‘Fully Secured’

“I believe we were fully secured, but that does not meanrisk-free,” Baxter testified. “Things happen between the first dayand when the loan matures.”

Geithner also rejected a last-ditch appeal from AIG’s then-chiefexecutive officer, Robert Willumstad, to reduce the government’sstake in the company to 50 percent and to allow it to break thedeal if it found a better offer.

Baxter said that the New York Fed wanted to quickly conclude thelifeline agreement to calm anxiety in the markets linked to thebankruptcy of Lehman Brothers Holdings Inc. and the near bankruptcyof several other financial institutions.

“We had fires all over the economy,” Baxter said. “We had to getone deal done. We had to get one fire out.”

Complete Documentation

The initial absence of complete documentation on the AIGbailout, what Baxter called “low doc lending,” didn’t give thegovernment the power it wanted to address how the company was run,Baxter testified.

The New York Fed wanted to replace some board members to improveAIG’s risk management and it worried that shareholders unhappy withthe bailout might try to install a new board that would pickleaders who “wanted to double down on bets” with taxpayers’ money,Baxter said.

“If you look at those legal documents, they could do nothing toaddress governance,” Baxter said during questioning by Starr’sattorney, David Boies.

The incomplete paperwork also presented a risk that Cohen, ofSullivan & Cromwell LLP, would try to re-negotiate the deal,Baxter testified.

Bear Stearns

“I knew he had done that with Bear Stearns,” Baxter said.

Boies, as he did with the trial’s first witness, Scott Alvarez,the general counsel of the Federal Reserve Board of Governors,confronted Baxter with documents in which he appears to expressmisgivings about regulators’ power to take stock as a condition ofthe bailout.

A central element of Starr’s complaint is that the Fed’s bailoutauthority at the time was limited to setting interest rates andthat it could not demand a surrender of stock as a condition forlending.

Interview Summary

In one document introduced by Boies, a summary of an interviewof Baxter by staff of the Financial Crisis Inquiry Commission, thelawyer is quoted saying, “We learned many things in September, andone was that we didn’t have the ability to own shares.”

Baxter told Boies he didn’t remember making the statement and“this is not consistent with my views.”

The case is being heard without a jury by U.S. Court of FederalClaims Judge Thomas Wheeler.

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

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