Timothy Geithner
Timothy Geithner testified in the AIG lawsuit Tuesday. Reuters

Former U.S. Treasury Secretary Timothy Geithner said Tuesday the collapse of insurance giant AIG would have been "catastrophic" and led to "mass panic." Geithner's testimony in the AIG lawsuit followed his predecessor Henry Paulson's support of the government bailout terms when he appeared Monday.

The AIG lawsuit being heard in federal court was filed by the insurance company's former CEO, Maurice "Hank" Greenberg. Greenberg is suing the federal government for $40 billion, saying the terms of the 2008 government bailout were illegal and led to the loss of billions of dollars for shareholders.

Geithner served as president of the Federal Reserve Bank of New York during the AIG bailout in 2008, and then succeeded Paulson as treasury secretary after President Barack Obama took office in 2009. During his testimony, he defended the government's bailout while acknowledging that the terms affected shareholders, the Wall Street Journal reported. Geithner seemed defensive during three hours of testimony when pressed by David Boies, Greenberg's lawyer.

Geithner said an AIG bankruptcy would have set off "mass panic on a global scale," reports Bloomberg. The fallout from the Lehman Brothers collapse was another factor in the decision to bailout AIG, notes the New York Times.

Geithner's book "Stress Test," which discusses the creation of the $700 billion Troubled Asset Relief Program and his role in the government bailouts, was the source for Boies' line of questioning, and he is expected to answer more questions in the afternoon session of the trial.