The 2008 derivatives crash was the worst in economic history, a potentially more apocalyptic event than the market crash that led to the Great Depression, said two of the men who are credited with saving the economy during that period of time.
Bernanke and Geithner’s testimony regarding the 2008 crash
In court documents, former US Federal Reserve Chairman Ben Bernanke and former US Treasury Secretary Timothy Geithner provided individual testimony regarding the crash of 2008.
For the first time Bernanke, known as a student of the Great Depression, said “September and October of 2008 was the worst financial crisis in global history,” according to a Wall Street Journal report. Geithner was characterized as offering a similar apocalyptic assessment, saying the economy was “in free fall,” consistent with his past comments on the issue. At the time 12 of the 13 major financial institutions, all with excessive unregulated derivatives exposure, could have failed at the same time. Currently these same financial institutions have dramatically increased their exposure to these derivatives products, which now total $700 trillion in risk exposure, several times the available capital of each bank and large enough to wipe out the $72 trillion plus world economy several times over.
Bernanke and Geithner were making statements regarding a lawsuit related to the US government’s bailout of American International Group Inc (NYSE:AIG), which, leading up to 2008, had written many of the insurance-like unregulated derivatives contracts that were at the center of the market crash. When market participants realized the derivatives products, marketed as top rated securities, actually contained toxic subprime loans, word quickly spread that the “insurance” obligations far exceeded the available capital of those writing the contracts had and a market crash ensued. Bernanke and Geithner were essentially the US government team that, in a dramatically short period of time, were required to shore up the US financial system.
AIG was treated much harsher than others: Greenberg
The suit is brought by Starr international Co, a firm run by American International Group Inc (NYSE:AIG)’s former chief executive, Maurice “Hank” Greenberg. Greenberg has made claims that AIG was treated in a much harsher fashion than others, including Goldman Sachs Group Inc (NYSE:GS). The lawsuit claims the government’s $182 billion bailout and subsequent sale of AIG assets was unconstitutional.
As part of the government’s defense, Bernanke said “AIG’s demise would be a catastrophe” and “could have resulted in a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income and jobs.”
Bernanke said AIG had “plenty of collateral to repay our loan” and that American International Group Inc (NYSE:AIG)’s broader business, minus the derivatives products, was solid.
For its part, AIG claims that selling the assets, derivative products and loan obligations, during the crisis netted a much lower sale price than had the government waited. The Fed sold the assets primarily from 2009 to 2012. The lawsuit is seen in some quarters as a move to reclaim Greenberg’s legacy as well as garner repayment for undue financial loss. Supporters of the government claim the suit is based on hindsight and had the government not forcefully stepped in when it did the financial crisis could have gotten much worse.