Oct. 7 (Bloomberg) — Former Treasury Secretary Henry Paulson's testimony that American International Group Inc. received harsher terms than other institutions getting government bailouts in the financial crisis set the stage for today's examination of a second architect of the rescue.
Timothy Geithner, the head of the Federal Reserve Bank of New York in 2008, was cited in earlier testimony as being responsible for setting what a Starr lawyer called "an extortion rate" of 14 percent. He took the stand this morning in a Washington federal court trial over claims by Maurice "Hank" Greenberg's Starr International Co. that the government illegally took equity in AIG.
Several copies of Geithner's book, "Stress Test," some with pages marked with Post-it notes, lay on the plaintiff and defense tables, fodder for questioning ahead. Greenberg's lawyer David Boies used a similar tactic yesterday, focusing on key pages in Paulson's book, "On the Brink," in questioning the former treasury secretary. Ben Bernanke, the former chairman of the Federal Reserve, is scheduled to take the stand tomorrow.
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Paulson testified that regulators wanted to send a message to markets that government help would cost them.

"It was important that terms be harsh because I take moral hazard seriously," Paulson said yesterday in federal court in Washington, referring to the economic term for consequence-free risk-taking.

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

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