The government engineered a takeover of AIG through a special stock plan, in part because officials feared some stakeholders would scuttle the deal, Timothy Geithner testified in a trial over the bailout.
The failing insurer issued $40 billion of new preferred shares, rather than so-called warrants, in exchange for a lifeline as the financial crisis deepened in 2008.
With AIG spiraling out of control, government officials didn't want to wait on an uncertain vote, said Geithner, the head of the New York Fed at the time.
The issue is central to Maurice "Hank" Greenberg's suit over the bailout terms. Greenberg argues the government structured the deal using preferred stock, as opposed to common shares, knowing it wouldn't win approval from shareholders.
The AIG founder and former chairman is suing the government for up to $40 billion, claiming shareholders weren't adequately compensated for the takeover and the terms of the bailout were too draconian.
Geithner, who said he holds Greenberg in a "complicated regard," was one of the architects of the bailout, along with then Treasury Secretary Hank Paulson and former Fed Chairman Ben Bernanke.
Letting the giant insurer fail wasn't an option and would have caused "mass panic on a global scale," Geithner told a Washington courtroom on Tuesday.
In September 2008, he called Robert Willumstad, then the head of AIG, and told him that he was going to send over a term sheet that proposed a 79.9 percent stake in the company and an 11 percent interest rate on an initial $65 billion loan. Willumstad would be fired.
"I told him he wouldn't like it," Geithner said, adding that Willumstad had about an hour or two to get the board to approve it and there wouldn't be any negotiations.
Before that deal happened, Paulson was lining up Edward Liddy to lead the company.
"Paulson is already recruiting a CEO," Geithner said, according to a transcript of an interview. "Paulson is unbelievable. Very cool."
Paulson testified on Monday that he personally recruited Liddy by phone.
The government wanted to avoid "winging by certain board members," Thomas Baxter, the NY Fed's general counsel, said in an e-mail at the time, using British slang for complaining.
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