It Really Was Too Big To Fail: Government’s Lead Outside Counsel in AIG Rescue Takes a Look Back


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New York, March 3, 2010 – When Marshall S. Huebner started his day during the height of the financial meltdown on Sept. 16, 2008, he did not expect to finish it with more than 300 million clients.
And many of them were worried.
“In the fall of 2008, the world was a very scary place, said Huebner, the co-head of the insolvency and restructuring group at Davis Polk, during an appearance Tuesday at Columbia Law School.
Huebner had been at the New York Federal Reserve on Sept. 16 representing JPMorgan Chase. But then the New York Fed asked Huebner immediately to take on the rescue of insurance giant AIG. JPMorgan Chase released Huebner from his commitments, and that afternoon he began his critical work for the American people.
Huebner was accustomed to high-stakes financial crises, having represented either the company or its lenders in the bankruptcy or restructuring of such companies as Enron, Adelphia Communications, Delta Air Lines, and Ford. But AIG made him a focal player in a very different – and perilous – game.
“When you’re working, essentially, for the American people, it does feel different,” he said while at the Law School to talk about his integral role in the bailout of AIG, which received more than $152 billion of taxpayer money. The financing was by far the largest ever extended to a corporate borrower.
“Certainly, the actions that have been taken have been appropriate and responsive to changing circumstances,” said Huebner, who while at Yale Law School was a classmate of David M. Schizer, Dean and Lucy G. Moses Professor of Law.
Huebner said there remains no doubt AIG had to be saved, and that only the government could prevent a financial disaster. He agreed with the assessment of Geithner, who said at the time that the Fed was “the only fire station in town that was still left open.”
“There was a fear that had the conflagration not been put out, it would have engulfed certainly Main Street and likely Wall Street as well,” Huebner said. “It would have been truly frightening to contemplate.”
One reason was the extent of AIG’s operations–223 companies in 130 countries with 76 million customers for its insurance products—as well as its deep involvement in many aspects of the financial markets. For example, it was the largest investor in corporate bonds in the U.S., and the second-largest investor in U.S. municipal bonds.
AIG put its fiscal health at risk, in part, by betting big on residential mortgage-backed securities to increase profits just before the market for them began to seize up, AIG faced the prospect of not having enough liquidity to pay its obligations.
“The problem is that what AIG never expected was that its own balance sheet could be downgraded,” Huebner said.
If AIG had been allowed to go under, Huebner warned, it would have destabilized already-shaky markets as the company sought to liquidate, and thrown the insurance industry into turmoil, with millions of policyholders faceing sharply higher premiums provided they could even get insurance.
“Many, many businesses were at risk of not surviving the fall of 2008, and things like a 90 percent increase in insurance premiums at a time when many were figuring out how to make payroll would have been devastating,” Huebner said.
That meant Huebner had little time to act. By noon on Sept. 16, he started work for the government, and that night helped secure $12 billion in AIG assets to allow the Fed to begin lending money. That work continued in the weeks ahead until some $152 billion was doled out, giving the government an 80 percent equity stake in AIG.
The worst, or at least the worst of the worst, was over. A process that can take even the most-experienced insolvency lawyers months to navigate was pulled off in a matter of hours. But there was no other choice if a full-scale panic was to be averted.
“I am extraordinarily proud of the work that the Fed and the Treasury have done on AIG from, really, the very first minute,” Huebner said. “I think they were operating in an area where there was no clear regulatory authority and acted to save the U.S. financial system.”
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