(Bloomberg) -- Former Federal Reserve Chairman Ben Bernanke, testifying at a trial over the 2008 bailout of American International Group Inc., said he didn’t know at the time the basis for what’s been called a “crazily high” interest rate the government charged the insurer.

Maurice “Hank” Greenberg’s Starr International Co. claims the government illegally took equity in the insurer, with Starr’s lawyers saying a 14 percent on an $85 billion rescue loan was an “extortion rate.” Starr is seeking at least $25 billion in damages.

“I have since learned something about it, but at the time I didn’t know” what the basis was for the rate for the loan, Bernanke said under questioning from Starr’s lawyer David Boies in Washington federal court.

Starr was AIG’s biggest shareholder when the financial crisis struck. It claims the government punished AIG, which Greenberg led for almost 40 years, by demanding 80 percent equity and imposing a far higher interest rate than other bailout recipients, such as banks, had to pay. That stake later rose to as much as 92 percent after further government assistance.

Although the Fed’s legal authority to take equity as part of a loan agreement is at the heart of the case it wasn’t brought up much by either side in questioning of Timothy Geithner, who was the head of the Federal Reserve Bank of New York in 2008, or former Treasury Secretary Henry Paulson, both of whom preceded Bernanke in testifying. The three men were considered the architects of the U.S. response to the financial crisis.

Legal Authority

The subject of the legal authority came up briefly in an e- mail Boies referred to near the end of Geithner’s testimony today.

The May 2008 note from Thomas Baxter, the general counsel of the New York Fed, to Geithner, stated that “we in New York” have a more expansive view of what the central bank can do under an “incidental powers” section of the law and that some officials at the Federal Reserve Board of Governors “see our conduct as loophole lawyering.”

Later in the hearing, lawyers for both sides discussed ground rules for Starr’s access to a Fed volume dubbed the Doomsday book, a compendium of confidential legal opinions about what the central bank can do in a variety of crisis situations.

Judge Alone

U.S. Court of Federal Claims Judge Thomas Wheeler, who is trying the case without a jury, said he was inclined to give Starr access even to opinions generated decades ago.

“I think all of that is relevant,” Wheeler said. He ordered lawyers for Starr, the Justice Department and the Fed to work out a system that would give the plaintiffs broader access to the information.

AIG’s failure would have threatened the whole financial system, Bernanke said, echoing earlier testimony from Timothy Geithner, who was the head of the Federal Reserve Bank of New York.

The Fed, which authorized him to make the loan, acted with “a huge amount of trepidation and reluctance,” Geithner said yesterday in response to questions by Kenneth Dintzer, a Justice Department lawyer.

As an insurance company, AIG wasn’t regulated by the Fed, leaving the central bank with little insight into “the risks they were taking,” Geithner testified.

“We had no formal supervisory relationship with AIG,” he said.

Initial Reluctance

Geithner said he overcame an initial reluctance to intervene when he was convinced that a failure of New York-based AIG would cause catastrophic damage to the economy. The company had financial links to a range of institutions including banks and retail insurance companies across the globe, he said.

Bernanke, showing little emotion in contrast to Geithner, who grinned frequently during his testimony, spoke of a meeting where the rate was discussed for the AIG loan and said the New York Fed proposed the actual rate.

Geithner testified he was ultimately responsible for setting the rate. He said he wanted the interest rate and other terms of the loan to be “tough enough that they were not viewed as attractive” to other companies that might seek a government bailout.

The initial loan of $85 billion grew to $182 billion. AIG returned to profitability and repaid the assistance in 2012, leaving the government with a $22.7 billion profit.

Geithner was named Treasury Secretary by President Barack Obama, a Democrat, in January 2009, serving until January 2013. He currently is president and managing director of Warburg Pincus LLC.

The case is Starr International Co. v. U.S., 11-cv-00779, U.S. Court of Federal Claims (Washington).

--With assistance from Laura Davison and Zachary Tracer in New York.

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