Fair Game: Bailout Risk, Far Beyond the Banks

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DealBook: UBS Repays Loan It Received During Bailout

High & Low Finance: In Ireland, Dire Echoes Of a Bailout Gone Awry

Now we learn that it was based in no small part on manipulative lies by venal bankers.

The leak of audiotapes of phone conversations between top officials of Anglo Irish Bank, which was by far the worst of a very bad lot, has stunned Ireland and damaged its relations with Germany.

It now appears that the bank lied to Irish officials about how much trouble it was in when the government, at the end of September 2008, guaranteed all the bank’s liabilities.

On one tape, John Bowe, Anglo Irish’s director of the treasury, conceded that he had no rational basis for telling the government that 7 billion euros was all it would take to rescue the bank.

“If they saw the enormity of it up front, they might decide, they might decide they have a choice,” he said to his colleagues in a tape disclosed by The Irish Independent. “They might say the cost to the taxpayer is too high.”

It was important for the problem to look “big enough to be important, but not too big that it kind of spoils everything.”

The problem certainly did “spoil everything” and continues to do so. The Anglo Irish bailout turned out to cost tens of billions of euros from Irish taxpayers and the European Union. Had Irish officials acted more wisely then, the country would still be in bad shape now, but the cost to the government would be much lower. There probably would have been less need for the continuing austerity that has, once again, caused Ireland to lapse into recession.

But by then, the basic problem had been created. Ireland had inflated a property bubble far greater than the American one, and losses were going to be immense when prices collapsed. Regulators were clueless, or worse, about what was actually happening. There seems to have been no one in the government who was truly familiar with the bank. Outside experts were called in, but it is not easy during a crisis to evaluate something from scratch.

At the time, however, it was easy to think that the situation was not as bad as it turned out to be. Irish real estate prices had not collapsed — that would come soon — and it seemed possible that the problems affecting Irish banks, particularly Anglo Irish, were temporary.

The word was liquidity. If that was the only problem a bank had — if there was a temporary difficulty in raising money to reassure depositors but the underlying loans were solid — then a bailout could work with little or no long-term cost. But if the real problem was one of solvency, a bailout risked throwing good money after bad.

Two weeks before the Irish bank guarantee, the financial world was shaken by the collapse of Lehman Brothers in the United States. It showed that large financial institutions were interconnected in ways that no one had really considered before and quickly led to a consensus that the American government had erred in not somehow keeping Lehman afloat.

We now know that Lehman was broke, but at the time it appeared to have ample capital. What was missing, one leading American regulator assured me at the time, was a requirement that the bank retain sufficient liquidity to deal with a panic.

In that atmosphere, it may be understandable that Irish officials fell for the tempting story that there was no real problem, just a bit of unfounded panic. But once they did, the power shifted to the bankers. The tapes show that the bankers were furious about government delays in releasing money once the guarantee was offered.

“You’re putting the government at risk with your delays,” said David Drumm, Anglo Irish’s chief executive, in discussing what he would say to officials at a meeting. Talk of due diligence was ridiculous. Ireland had told the world “we’re all solvent.” Now, it should simply write “a two or three billion check and get on with it.”

He described such a check as “very small.” Relative to the ultimate cost, he was right.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

I.M.F. and Pakistan Agree To a $5.3 Billion Bailout

The rescue package is expected to soothe Western fears about the state of Pakistan’s economy, which has slumped in recent years amid unrelenting Taliban violence and deeply rooted corruption that have shaken investor confidence. The I.M.F. package also would provide a tangible lift for the newly elected prime minister, Nawaz Sharif, who has already become bogged down by a seemingly intractable energy crisis.

The I.M.F. has an unhappy history with Pakistanis, some of whom are likely to see the package negatively. The last government failed to meet the terms of the previous I.M.F. package six years ago, and the country is still struggling to repay billions of dollars of that debt.

Moreover, Mr. Sharif’s government is ideologically hostile to international financial assistance, and he campaigned before the election on a platform of economic autonomy. But, analysts say, his administration had little choice but to accept Thursday’s deal.

The $5.3 billion package will be used in part to service the existing I.M.F. debt, but also to create confidence in the economy and alleviate the severe energy crisis, which has included crippling electricity cuts across the country, even in the capital, Islamabad, in recent months.

“It was a necessary thing,” said Sakib Sherani, an economist who advised the last government. “Everyone’s been on tenterhooks about the balance of payments crisis, and a possible run on the rupee. At least this will provide some stability so the new government can work on implementing its own agenda.”

At a news conference on Thursday evening, Jeffrey Franks, head of the visiting I.M.F. mission to Pakistan, said the package included provisions for a reduction in Pakistan’s budget deficit — which almost hit 9 percent of gross domestic product last year — and a comprehensive energy sector overhaul.

Power shortages have been sapping Pakistan’s economic growth potential, Mr. Franks said, and the bailout aims to put the energy sector on more stable footing.

The $5.3 billion loan is subject to approval by the I.M.F. executive board, which is scheduled to meet in early September. If the loan proceeds, it will carry an interest rate of about 3 percent and be disbursed over three years, Mr. Franks said.

Ishaq Dar, the Pakistani finance minister, denied that his government had reneged on its election pledges of economic independence.

“We are entering into a new program for the good of the country,” he said. “A better tomorrow dawns only when requisite pains are borne today.”

The I.M.F. loan is unlikely to be used to directly finance the oil imports needed to get Pakistan’s power stations working at normal capacity, Mr. Sherani said. But it may provide a jolt of confidence among other international institutions that, in turn, would help finance oil imports.

Mr. Franks acknowledged Pakistan’s failure to repay previous loans from his institution. But Mr. Sharif’s government will not be punished for the sins of its predecessors, he added.

“We’re not going to turn a country down because previous governments did not do what they had promised to do,” he said.

Declan Walsh reported from London, and Salman Masood from Islamabad, Pakistan.

In Europe, Growing Concern Slovenia Is Next to Need Bailout

The rewards of success included an imposing mountainside retreat and frequent mention of his name as a possible future finance minister of this small, idyllic Alpine country.

Now, though, Mr. Kordez stands convicted of forgery and abuse of office for financial dealings as Merkur struggled under a mountain of debt.

“My mistake and the mistake of the banks was to vastly underestimate the risk,” Mr. Kordez, 56, said in a recent interview at his home near the picturesque town of Bled, with a view of Slovenia’s highest peak. He awaits a decision later this month on an appeal of his conviction, which could send him to prison for five years.

As fears grow that Slovenia could follow Cyprus and become the sixth euro zone country to seek a bailout, his rise and fall have come to symbolize the way easy and cheap credit, combined with Balkan-style crony capitalism and corporate mismanagement, fueled a banking crisis that has unhinged a country previously praised as a regional model of peaceful prosperity.

The recent bailout of Cyprus at a cost of €10 billion, or $13 billion, which included stringent conditions forcing losses on bank depositors, has focused minds in Ljubljana, the Slovenian capital. Slovenia’s struggling banking sector is saddled with about €6.8 billion worth of nonperforming loans, about one-fifth of the national economy. Slovenia is now in recession, and the gloom across the euro zone shows little sign of abating. A European Commission forecast released Friday said that France, Spain, Italy and the Netherlands — four of the five largest euro zone economies — will be in recession through 2013.

Last Thursday, Slovenia bought time by borrowing $3.5 billion on international markets. That was two days after Moody’s Investors Service cut the country’s credit rating to junk status, citing the banking turmoil and a deteriorating national balance sheet. Analysts said the bond sale would probably enable the government of the new prime minister, Alenka Bratusek, to stay afloat at least through the end of the year.

The Cypriot debacle has shown how bailing out even a small country can damage the credibility of the euro currency union. But Slovenia, with two million people, insists that it is not Cyprus and will not seek emergency aid.

“For the time being, I have a sound sleep,” Ms. Bratusek, the 42-year-old prime minister, said in a recent interview.

This week, on Thursday, Ms. Bratusek, only a little more than a month in office, is expected to present a financial turnaround plan to the European Commission, the executive arm of the European Union. She said that privatizing Slovenia’s largely state-owned banking sector was a priority, along with creating a “bad bank” to take over nonperforming loans.

Her government, she said, will also unveil plans by July to sell the country’s second-largest bank, Nova Kreditna Banka Maribor, along with two large state companies that she declined to specify. The sales could raise up to €2 billion, she said.

Ms. Bratusek, who once headed the state budget office at the Finance Ministry, said Slovenia’s government debt, which analysts say rose from about 54 percent of gross domestic product to around 64 percent with last week’s bond sale, still ranked at the lower end of that scale in the euro area.

But the 6 percent interest rate Slovenia offered on the 10-year bonds in last week’s debt sale, at a time when some euro zone countries are enjoying historically low borrowing costs — Germany’s equivalent bond is trading below 1.2 percent — might only add to the country’s financial problems.

Mujtaba Rahman, director of Europe at Eurasia Group, a political risk consulting firm, said the new financing could backfire if it lulled the government into laxity about making vital structural changes.

“The new financing was not a vote of confidence in the Slovenian government or in the economy, but rather reflects investors attracted by high bond yields,” Mr. Rahman said. “A bailout could still prove inevitable.”

What went wrong in Slovenia? The country, wedged between Italy, Austria, Hungary and Croatia, was considered the most promising among the 10 new European Union entrants when it joined in 2004. That was 13 years after it declared independence from Yugoslavia, avoiding a bloody Balkan war that had swept up other countries in the region.

Cyprus’s Bailout Plan Meets With Skepticism

The Parliament put off until later this weekend a vote on a crucial new proposal that would confiscate 22 to 25 percent of uninsured deposits above 100,000 euros through a new tax on account holders in one of the nation’s most troubled banks.

So with a deadline imposed by the European Central Bank looming on Monday, it appeared there was still no immediate path to a lifeline of 10 billion euros, or $13 billion, that Cyprus needs to keep its banks from collapsing.

Cyprus’s so-called troika of lenders — the International Monetary Fund, the European Commission and the European Central Bank — must still approve any plan. President Nicos Anastasiades was scheduled to fly to Brussels on Saturday to meet with European Union leaders, a spokesman said.

Monday is a national holiday in Cyprus, but banks are supposed to reopen on Tuesday for the first time in more than a week. There is widespread fear of a classic bank run.

On Friday, Cypriots jammed into supermarkets after lining up all day Thursday at automated teller machines to withdraw as much cash as possible. Gas stations were taking cash only, and some retailers reported that they would no longer accept credit.

One of the provisions Parliament approved Friday would impose new restrictions on withdrawing cash or moving money out of the country when the banks reopen. These new capital controls would prohibit or restrict check-cashing and bar “premature” account closings or any other transaction the authorities deemed unwarranted.

Lawmakers also voted to restructure the nation’s largest and most troubled bank, Laiki Bank, by splitting off its troubled assets into a so-called bad bank. Accounts with no problem would be transferred to the nation’s largest financial institution, the Bank of Cyprus. Lawmakers also voted to require that any bank on the verge of bankruptcy be split apart in the same way.

By effectively shutting down one of the banks needing support, the government could lower the 5.8-billion-euro sum that international lenders are demanding in exchange for a bailout. The consolidation of Laiki, also known as Cyprus Popular Bank, effectively relieves the government of a large expense of supporting the banking system, which is on the verge of collapsing under a mountain of souring loans to Greek businesses and individuals.

Still to be voted on is the measure to impose a tax of 22 to 25 percent on uninsured deposits at the Bank of Cyprus. That proposal was made after lawmakers rejected a plan earlier in the week to tax insured deposits to help raise the amount needed to secure the bailout. The Parliament appears to be trying to make up the difference in part by shifting the burden to large account holders.

When euro zone finance ministers negotiated the original bailout terms last weekend, Cypriot officials had resisted limiting the tax to large accounts, evidently to avoid damaging the country’s reputation as a haven for wealthy banking clients. Many of the wealthiest citizens of Russia have euro-denominated bank accounts in Cyprus, which is one reason that euro zone finance ministers have taken such a hard line.

The decision to tax uninsured deposits came after Cyprus proposed nationalizing the pension funds of state-owned Cypriot companies.

Lawmakers approved the pension takeover on Friday, but the move was denounced in Germany, whose political and financial influence in the euro zone tends to dictate policy.

  “When you consider that there was massive resistance against involving the savings, then it is not easy to see how tapping the pension funds, which we view as socially a much more drastic step, is a very good idea,” Steffen Seibert, a spokesman for the German chancellor, Angela Merkel, told reporters.

The suggestion of tapping pension funds touches off a visceral response in Germany, where history has proved the dangers of such ideas. German pensions were tapped to finance both world wars, and the idea remains anathema to German leaders today.

Contributing reporting were Melissa Eddy in Berlin, James Kanter in Brussels, David M. Herszenhorn in Moscow, Niki Kitsantonis in Athens and Andreas Riris in Nicosia.

Cyprus Rejects Bank Deposit Tax, Scuttling Bailout Deal

The lawmakers sent President Nicos Anastasiades back to the drawing board with international bailout negotiators to devise a new plan that might still enable the country to receive a financial lifeline, while avoiding a devastating default that could reignite the euro crisis.

Lawmakers rejected the plan, with 36 voting no and 19 abstaining, arguing that it would be unacceptable to take money from account holders. One member of Parliament who was out of the country did not vote.

Marios Karoyian, the head of the Democratic Party in Mr. Anastasiades’s coalition government, called the bailout terms an “attack” against Cyprus. “The decision for a haircut is unethical and erodes the foundation of the E.U.,” he said. “We’re dealing with raw blackmail that could lead to the collapse of the euro zone.”

Analysts have raised the possibility of a bank run in Cyprus and a cut-off of financing to Cypriot banks from the European Central Bank if the measure did not pass. It is still possible banks might not be able to open their doors Thursday, the day that a scheduled bank holiday was supposed to end.

Michael Olympios, chairman of the Cyprus Investor Association said Parliament’s rejection of the bailout deal “will buy us some time to see if we can come up with a better agreement.”

He said one possibility under active consideration was for a Russian bank to buy Cyprus's biggest troubled lender, Cyprus Popular Bank, in a deal that could reduce the amount of the €10 billion bailout sought by Cyprus. Any such move would very likely be backed by the Kremlin, Mr. Olympios added, and could reduce the tax that Russian depositors might otherwise have to pay.

The Cypriot finance minister headed to Moscow earlier in the day to seek financial assistance from Russia.

The bailout measure failed Tuesday night despite a revision that would have removed some objections by exempting small bank accounts from the levies.

The European Central Bank indicated late Tuesday that it would not immediately cut off emergency cash — without which Cypriot banks probably could not survive. In a terse statement, the E.C.B. said it had taken note of the Cypriots Parliament’s decision and was consulting with the International Monetary Fund and European Commission, its partners in the so-called troika of international lenders that are trying to keep Cyprus financially afloat.

But, in a tacit warning that it would not provide the so-called emergency liquidity assistance forever, the E.C.B. said it would stick to rules that allow lending only to solvent banks. The Cyprus banks, while wobbly, are not yet insolvent. “The E.C.B. reaffirms its commitment to provide liquidity as needed within the existing rules,” the central bank said.

The original terms of the bailout, as reached last weekend, called for a one-time tax of 6.75 percent on deposits of less than €100,000, or $129,000, and a 9.9 percent tax on holdings of more than €100,000. The taxes, a condition imposed by Cyprus’s fellow E.U. members, were meant to raise €5.8 billion of the total €10 billion bailout cost.

Under the revision put forward by Mr. Anastasiades early Tuesday, depositors with less than €20,000 in the bank would be exempt, but the taxes would remain in place for accounts above that amount.

The rejection drew loud cheers and cries of joy from a crowd of more than 500 protesters who had gathered in front of Parliament since late afternoon, carrying banners denouncing what they said was a confiscation of their private funds. Some wielded unflattering posters of Chancellor Angela Merkel of Germany, a day after a demonstrator breached security at the German Embassy and climbed to the roof, throwing down the German flag.

“Today, Germany is engaging in Nazism again, not with the weapon of force, but with money,” said a pensioner, Dimitris, 67, who would give only his first name.

This article has been revised to reflect the following correction:

Correction: March 19, 2013

An earlier version of this article misstated the vote totals in Parliament. The vote was 36 against and 19 abstaining, not 36 against and 19 in favor.

Cyprus Bailout Incites Turmoil as Blame Flies

BRUSSELS — A plan to rescue the tiny European country of Cyprus, assembled overnight in Brussels, has left financial regulators, German politicians, panicked Cypriot leaders and a disgruntled Kremlin with a bailout package that has outraged virtually all the parties.

A Russian market in Limassol, Cyprus. Russia was angry it was left out of talks to aid Cyprus, where it has billions in banks.

In the end, a bailout deal that was supposed to calm a financial crisis in an economically insignificant Mediterranean nation spread it wider. Word of the plan unnerved markets across Europe, raised fears of bank instability in Spain and Italy and sent pensioners into the streets of the island’s capital, Nicosia, in protest.

As markets tumbled and the Cypriot Parliament fell into turmoil, salvos of blame were hurled back and forth across the Continent.

Officials scrambled to explain what went wrong and how best to control the damage of what Philip Whyte, a senior research fellow at the Center for European Reform, called a “completely irrational decision” to make bank depositors liable for part of the bailout. The deal flopped so badly that finance ministers who came up with it shortly before dawn on Saturday were on the phone to each other Monday night talking about ways to revise it. Whatever the outcome, the dispute is a vivid demonstration of why Europe, which until recently was congratulating itself on having weathered the worst of the financial storm, has trouble making decisions with so many different interests represented at the table.

Politics, both domestic and international, get in the way of economics and make it difficult for wealthy countries to line up behind a plan to help the smallest ones. The northern European nations have grown so weary of bailouts for their southern neighbors that they were intent on exacting a hefty contribution from their latest supplicant. Germany in particular, with parliamentary elections looming in September, was set on driving a hard bargain.

A wild card in this instance were the Russians, who have deposited billions in Cypriot banks, extended a $3.25 billion line of credit to Nicosia in 2011 and were in negotiations to help out Cyprus once again. Cypriot leaders apparently were so concerned with keeping their wealthy offshore Russian customers happy that they pushed their own citizens to pay even more than some of the lenders were demanding.

The Russians reacted angrily to a so-called stability tax on deposits in Cyprus, and at being left out of the negotiations. On Monday, Russia’s minister of finance, Anton Siluanov, warned that Russia might not extend the existing credit line because the Europeans had not consulted authorities in Moscow about the deposit levy plan. On Sunday, one Russian official was reported by the Interfax news agency as advising Russians to withdraw funds from Cyprus, saying the banking system was untrustworthy.

The all-night discussions began Friday and ran for 10 hours, ending shortly before dawn on Saturday. Cyprus needed to come up with billions of dollars to help cover the costs of the bailout of the country’s financial sector, or its European allies said they would leave it to face the prospect of collapse alone.

Each of the major stakeholders, which included the International Monetary Fund, the European Central Bank and euro zone finance ministers, entered the room with a conflicting goal. Protecting the small-time saver was at the top of no one’s list. The result was a compromise solution everyone is now unhappy with, officials say, one that stands to cost ordinary Cypriot depositors 6.75 percent of their savings.

The Germans and their northern European allies wanted to exact a maximum contribution from Cyprus to ensure the deal could pass their recalcitrant, bailout-weary parliaments at home. A confidential report by the German foreign intelligence agency, known by its German initials as the B.N.D., was making the rounds, one that painted the island as a haven for money-laundering. The stigma attached to helping the Cypriots — and the political cost in an election year — was rising rapidly.

The I.M.F. was dead set on keeping the debt at what its number-crunchers considered a sustainable level. The Cypriots, meanwhile, wanted to spread the pain around.

Nicholas Kulish reported from Berlin and Andrew Higgins from Brussels. Reporting was contributed by Andrew E. Kramer and David Herszenhorn in Moscow, Jack Ewing in Frankfurt and Andrew Siddons in Washington.

This article has been revised to reflect the following correction:

Correction: March 19, 2013

An earlier version of this article misspelled the surname of a contributor. He is Andrew Siddons, not Siddon.

Cyprus Rejects Bank Deposit Tax, Scuttling Bailout Deal

The lawmakers sent President Nicos Anastasiades back to the drawing board with international bailout negotiators to devise a new plan that might still enable the country to receive a financial lifeline, while avoiding a devastating default that could reignite the euro crisis.

Lawmakers rejected the plan, with 36 voting no and 19 abstaining, arguing that it would be unacceptable to take money from account holders. One member of Parliament who was out of the country did not vote.

Marios Karoyian, the head of the Democratic Party in Mr. Anastasiades’s coalition government, called the bailout terms an “attack” against Cyprus. “The decision for a haircut is unethical and erodes the foundation of the E.U.,” he said. “We’re dealing with raw blackmail that could lead to the collapse of the euro zone.”

Analysts have raised the possibility of a bank run in Cyprus and a cut-off of financing to Cypriot banks from the European Central Bank if the measure did not pass. It is still possible banks might not be able to open their doors Thursday, the day that a scheduled bank holiday was supposed to end.

Michael Olympios, chairman of the Cyprus Investor Association said Parliament’s rejection of the bailout deal “will buy us some time to see if we can come up with a better agreement.”

He said one possibility under active consideration was for a Russian bank to buy Cyprus's biggest troubled lender, Cyprus Popular Bank, in a deal that could reduce the amount of the €10 billion bailout sought by Cyprus. Any such move would very likely be backed by the Kremlin, Mr. Olympios added, and could reduce the tax that Russian depositors might otherwise have to pay.

The Cypriot finance minister headed to Moscow earlier in the day to seek financial assistance from Russia.

The bailout measure failed Tuesday night despite a revision that would have removed some objections by exempting small bank accounts from the levies.

The European Central Bank indicated late Tuesday that it would not immediately cut off emergency cash — without which Cypriot banks probably could not survive. In a terse statement, the E.C.B. said it had taken note of the Cypriots Parliament’s decision and was consulting with the International Monetary Fund and European Commission, its partners in the so-called troika of international lenders that are trying to keep Cyprus financially afloat.

But, in a tacit warning that it would not provide the so-called emergency liquidity assistance forever, the E.C.B. said it would stick to rules that allow lending only to solvent banks. The Cyprus banks, while wobbly, are not yet insolvent. “The E.C.B. reaffirms its commitment to provide liquidity as needed within the existing rules,” the central bank said.

The original terms of the bailout, as reached last weekend, called for a one-time tax of 6.75 percent on deposits of less than €100,000, or $129,000, and a 9.9 percent tax on holdings of more than €100,000. The taxes, a condition imposed by Cyprus’s fellow E.U. members, were meant to raise €5.8 billion of the total €10 billion bailout cost.

Under the revision put forward by Mr. Anastasiades early Tuesday, depositors with less than €20,000 in the bank would be exempt, but the taxes would remain in place for accounts above that amount.

The rejection drew loud cheers and cries of joy from a crowd of more than 500 protesters who had gathered in front of Parliament since late afternoon, carrying banners denouncing what they said was a confiscation of their private funds. Some wielded unflattering posters of Chancellor Angela Merkel of Germany, a day after a demonstrator breached security at the German Embassy and climbed to the roof, throwing down the German flag.

“Today, Germany is engaging in Nazism again, not with the weapon of force, but with money,” said a pensioner, Dimitris, 67, who would give only his first name.

This article has been revised to reflect the following correction:

Correction: March 19, 2013

An earlier version of this article misstated the vote totals in Parliament. The vote was 36 against and 19 abstaining, not 36 against and 19 in favor.

DealBook: Examining the Terms of A.I.G.'s Bailout

Chip Somodevilla/Getty ImagesMaurice R. Greenberg, A.I.G.’s former chief, at a House panel in 2009.

The American International Group’s former chief executive, Maurice R. Greenberg, is contending in a lawsuit that the government treated the company’s shareholders too harshly when carrying out its 2008 rescue of the insurance giant. But a closer look at the $182 billion rescue suggests a different outcome.

Soon after the bailout, the Treasury Department substantially softened the terms of its support. This lenience made life a lot easier for A.I.G. – and arguably benefited shareholders like Mr. Greenberg.

A.I.G. is weighing whether to join the lawsuit, filed by Mr. Greenberg’s investment firm, Starr International Company. A.I.G. most likely will not end up joining forces with Mr. Greenberg, but, as a duty to shareholders, it has to at least give his suit a thorough assessment.

One of Starr International’s major arguments is that A.I.G.’s bailout terms were far tougher than those granted to other large financial firms. But A.I.G.’s cash needs and internal failings were in many ways far more serious than those of other institutions. In fact, the company was in such dire straits after the rescue that the government chose to loosen the terms of its aid.

The concessions were considerable.

In early 2009, the Federal Reserve cut the interest rate on a big loan to A.I.G. At the time, the company said that would save it $1 billion a year in interest.

The Treasury Department made another favorable change. It exchanged $40 billion of preferred shares for new ones that effectively paid no cash dividends to taxpayers. If it had paid the originally agreed 10 percent dividend on all these and other preferred shares, the insurer would have paid roughly $20 billion from the beginning of 2009 to the end 2012.

Instead, the preferred shares were converted into common stock, which the government later sold. The Treasury Department made a $5 billion return on its investments.

The government could have made more, if it had chosen to.

For example, the Treasury Department could have demanded an even bigger stake in A.I.G. in return for the dividends it did not get. This would have further diluted existing shareholders like Mr. Greenberg. If the Treasury Department had decided on further dilution, A.I.G.’s shares could have become effectively worthless, like those of Fannie Mae and Freddie Mac, the mortgage firms also bailed out by taxpayers in 2008.

Fannie and Freddie’s rescue also required that the companies pay a 10 percent dividend on its government money. But the Treasury Department never let them off the hook on that commitment. The result was that taxpayers have received more than $50 billion of dividends so far from Fannie and Freddie.

In short, A.I.G.’s shareholders may contend they got a raw deal, but it’s not that simple.

DealBook: Rescued by a Bailout, A.I.G. May Sue Its Savior

Mark Lennihan/Associated PressAn American International Group office building in New York in 2008.

Fresh from paying back a $182 billion bailout, the American International Group has been running a nationwide advertising campaign with the tagline “Thank you America.”

Behind the scenes, the restored insurance company is weighing whether to tell the government agencies that rescued it during the financial crisis: thanks, but you cheated our shareholders.

The board of A.I.G. will meet on Wednesday to consider joining a $25 billion shareholder lawsuit against the government, court records show. The lawsuit does not argue that government help was not needed. It contends that the onerous nature of the rescue — the taking of what became a 92 percent stake in the company, the deal’s high interest rates and the funneling of billions to the insurer’s Wall Street clients — deprived shareholders of tens of billions of dollars and violated the Fifth Amendment, which prohibits the taking of private property for “public use, without just compensation.”

Maurice R. Greenberg, A.I.G.’s former chief executive, who remains a major investor in the company, filed the lawsuit in 2011 on behalf of fellow shareholders. He has since urged A.I.G. to join the case, a move that could nudge the government into settlement talks.

The choice is not a simple one for the insurer. Its board members, most of whom joined after the bailout, owe a duty to shareholders to consider the lawsuit. If the board does not give careful consideration to the case, Mr. Greenberg could challenge its decision to abstain.

Should Mr. Greenberg snare a major settlement without A.I.G., the company could face additional lawsuits from other shareholders. Suing the government would not only placate the 87-year-old former chief, but would put A.I.G. in line for a potential payout.

Yet such a move would almost certainly be widely seen as an audacious display of ingratitude. The action would also threaten to inflame tensions in Washington, where the company has become a byword for excessive risk-taking on Wall Street.

Some government officials are already upset with the company for even seriously entertaining the lawsuit, people briefed on the matter said. The people, who spoke on the condition of anonymity, noted that without the bailout, A.I.G. shareholders would have fared far worse in bankruptcy.

“On the one hand, from a corporate governance perspective, it appears they’re being extra cautious and careful,” said Frank Partnoy, a former banker who is now a professor of law and finance at the University of San Diego School of Law. “On the other hand, it’s a slap in the face to the taxpayer and the government.”

For its part, A.I.G. has seized on the significance and complexity of the case, which is filed in both New York and Washington. A federal judge in New York dismissed the case, while the Washington court allowed it to proceed.

“The A.I.G. board of directors takes its fiduciary duties and business judgment responsibilities seriously,” said a spokesman, Jon Diat.

On Wednesday, the case will command the spotlight for several hours at A.I.G.’s Lower Manhattan headquarters.

Mr. Greenberg’s company, Starr International, will begin with a 45-minute presentation to the board, according to people briefed on the matter. Mr. Greenberg is expected to attend, they added.

It will be an unusual homecoming of sorts for Mr. Greenberg, who ran A.I.G. for nearly four decades until resigning amid investigations into an accounting scandal in 2005. For some years after his abrupt departure, there was bitterness and litigation between the company and its former chief.

After the Starr briefing on Wednesday, lawyers for the Treasury Department and the Federal Reserve Bank of New York — the architects of the bailout and defendants in the cases — will make their presentations. Each side will have a few minutes to rebut.

While the discussions are part of an already scheduled board meeting, securities lawyers say it is rare for an entire board to meet on a single piece of litigation.

“It makes eminent good sense in this case, but I’ve never heard of this kind of situation,” said Henry Hu, a former regulator who is now a professor at the University of Texas School of Law in Austin.

It is unclear whether the directors are leaning toward joining the case. The board said in a court filing that it would probably decide by the end of January.

Until now, the insurance giant has sat on the sidelines. But its delay in making a decision, some officials say, has drawn out the case, forcing the government to pay significant legal costs.

The presentations on Wednesday come on top of hundreds of pages of submissions that the government prepared last year, a time-consuming and costly process. The Justice Department, which assigned about a dozen lawyers to the case and hired outside experts, told a judge handling the matter that Starr was seeking 16 million pages in documents from the government.

“How many?” the startled judge, Thomas C. Wheeler, asked, according to a transcript.

Struck just days after the collapse of Lehman Brothers in September 2008, the bailout of A.I.G. proved to be among the biggest and thorniest of the financial crisis rescues. The company was on the brink of collapse because of deteriorating mortgage securities that it had insured through credit-default swaps.

Starting in 2010, the insurer embarked on a series of moves aimed at repaying its taxpayer-financed bailout, including selling major divisions. It also held a number of stock offerings for the government to reduce its stake, which eventually generated a roughly $22 billion profit.

Overseeing that comeback was a new chief executive, Robert H. Benmosche, a tough-talking longtime insurance executive. Mr. Benmosche has won plaudits, including from government officials, for his managing of A.I.G.’s public relations even as he helped nurse the company back to financial health.

But he and the rest of A.I.G.’s board must now confront an equally pugnacious predecessor in Mr. Greenberg.

In the case against the government, Mr. Greenberg, through his lead lawyer, David Boies, contends that the bailout plan extracted a “punitive” interest rate of more than 14 percent. The government’s huge stake in the company also diluted the holdings of existing shareholders like Starr, which at the time was A.I.G.’s largest investor.

“The government has been saying, ‘We’re your friend, we owned and controlled you and we let you go.’ But A.I.G. doesn’t owe loyalty to the government,” a person close to Mr. Greenberg said. “It owes loyalty to its shareholders.”

The government, Starr argues, used billions of dollars from A.I.G. to settle credit-default swaps the insurer had with banks like Goldman Sachs. The deal, according to the lawsuit, empowered the government to carry out a “backdoor bailout” of Wall Street.

Starr argued that the actions violated the Fifth Amendment. “The government is not empowered to trample shareholder and property rights even in the midst of a financial emergency,” the Starr complaint says.

The Treasury Department declined to comment. A spokesman for the Federal Reserve Bank of New York, Jack Gutt, said, “There is no merit to these allegations.” He noted that “A.I.G.’s board of directors had an alternative choice to borrowing from the Federal Reserve, and that choice was bankruptcy.”

A federal judge in Manhattan agreed, dismissing the case in November. In an 89-page opinion, Judge Paul A. Engelmayer wrote that while Starr’s complaint “paints a portrait of government treachery worthy of an Oliver Stone movie,” the company “voluntarily accepted the hard terms offered by the one and only rescuer that stood between it and imminent bankruptcy.”

The United States Court of Appeals for the Second Circuit recently agreed to review the case on an expedited timeline. The judge in the United States Court of Federal Claims in Washington, meanwhile, has declined to dismiss the case and continues to await A.I.G.’s decision.

The Trade: After Bailout, Giants Allowed to Dominate the Mortgage Business

Chip East/ReutersWilliam C. Dudley, the New York Fed’s president, recently criticized the concentration of mortgage originations at a few big banks.

Mortgage rates are so low that it may seem like a great time to get a mortgage. For banks, however, it probably is the greatest time ever.

The profit margin on the rates that they can charge customers and the price they can earn for selling those mortgages to investors is at a record. This is measured as the “spread,” or difference, between mortgage securities yields and mortgage rates.

Given that housing prices are beaten up and borrowers must put down bigger cushions than in recent years, it is “the most profitable, safest time ever to be a mortgage bank,” says Scott Simon, who is the head of mortgage investing at Pimco.

In the old days, there used to be a word for this kind of thing: price gouging.

And who is doing the gouging? Mainly, Wells Fargo and JPMorgan Chase. In the third quarter, reported in the last several weeks, both banks earned robust profits from the mortgage business.

The president of the Federal Reserve Bank of New York, William C. Dudley, vented this frustration in a recent speech, blaming the concentration of mortgage-making power at a few big banks.

Chip Somodevilla/Getty ImagesSheila Bair, former chairwoman of the Federal Deposit Insurance Corporation.

Mr. Dudley is right. But what he didn’t say was that his own institution (the Fed), his former boss (Treasury Secretary Timothy F. Geithner) and the Bush and Obama administrations delivered us this mess.

The broken mortgage market is the unintended consequence of the flawed banking bailout and the flaccid regulatory response in the aftermath of the financial crisis.

The government and the regulators have had two broad approaches to banking oversight during the crisis and its aftermath. First, regulators coddled the troubled big banks. The two weak behemoths, Citigroup and Bank of America, were granted time to work off their bad loans. Regulators practiced forbearance, overlooking the self-inflicted debacles — mostly housing related — on their balance sheets.

Regulators, meanwhile, encouraged the healthy giants to get even bigger by gobbling up the small and weak. So Wells Fargo bought Wachovia, and JPMorgan snapped up Washington Mutual.

It would be foolish to blame Wells Fargo and JPMorgan for this situation. Restaurants with 100 customers waiting in line outside the door wouldn’t, and shouldn’t, be expected to lower their prices; why should banks?

Yet allowing takeovers without forcing weak competitors to get healthy quickly leads to an oligopoly. Exhibit A: Wells Fargo and JPMorgan dominate the mortgage business. They should face some competition. Instead, their biggest threats, Citigroup and Bank of America, are, astonishingly, pulling out.

Citigroup and Bank of America appear to have made a profound mistake. It’s one of the many strategic errors that ultimately got Vikram S. Pandit ousted as Citi’s chief executive. Mr. Pandit viewed mortgages as a “noncore” business for Citigroup. Whoops.

But it’s not a surprising one. These are traumatized institutions, limping along, preoccupied by the past and unable to look forward, says Sheila Bair, the former chairwoman of the Federal Deposit Insurance Corporation and author of the new crisis account, “Bull by the Horns.” She rightly calls it “another downside of the bailouts. We simply propped up weak institutions instead of making them restructure.”

The odd twist is that the Federal Reserve is a victim here, too. Despite its move to buy mortgage-backed securities in its latest round of extraordinary measures to lower interest rates, it can nudge them only so far because of the dysfunctional, noncompetitive market.

Regulators could have broken up Citigroup and Bank of America, spinning off their mortgage operations into well-capitalized, nimble competitors. Perhaps they could have forced those banks to take big write-downs on their mortgage assets, settled their lawsuits and moved on, putting the past where it belongs.

Bankers, of course, don’t like this analysis. It’s common for them and others to argue that what’s really ailing the mortgage market are delays in putting new Dodd-Frank mortgage rules in place, like the ones that define the standards for mortgages that can be bundled into securities.

And, yes, that is probably hindering new competition from entering the market, though it certainly can’t fully, or even mostly, explain Citigroup and Bank of America abandoning the field. And, of course, the banks themselves bear much of the blame because they went all out to obstruct the rollout of new regulations. But, ultimately, the Dodd Frank delay is yet another example of how the government’s inefficient postcrisis process has hurt the marketplace.

There has been plenty of talk about how the government saved the financial system after the crisis. And it did. Now the question is: Is this what we saved it for?