The U.S. extorted American International Group Inc. shareholders when it extended a $182 billion taxpayer bailout at the height of the 2008 financial crisis, a lawyer for Maurice "Hank" Greenberg said.
Greenberg's Starr International Co., AIG's largest shareholder when the financial crisis struck, sued the government, calling its assumption of 80 percent of the insurer's stock an unconstitutional "taking" of property that requires at least $25 billion in compensation.
A trial over his claims started Monday in Washington, where David Boies, Greenberg's litigator, will question the architects of the bailout, including Ben Bernanke, Henry Paulson and Timothy Geithner. Boies said the Federal Reserve Bank of New York punished AIG by demanding equity and charging 14 percent interest to borrow, or far more than major banks.
"They charged an extortion rate," Boies said in his opening statement in the U.S. Court of Federal Claims. "They tried to demonize AIG and suggest somehow that AIG was a poster child for problems during the financial crisis."
Greenberg, who built AIG into the world's biggest insurer before leaving in 2005, claims the government trampled the rights of shareholders. Boies said the banks got better terms even though some later settled civil claims by the U.S. that they fraudulently marketed mortgage-backed securities.
In outlining the government's defense, Justice Department attorney Kenneth Dintzer said the U.S. acted lawfully through the bailout of AIG to avert a world economic collapse. Without the deal, AIG would have faced bankruptcy.
"It was so big and so entrenched in the world's economic system that its failure threatened the world's economy," Dintzer said in his opening statement. "The goal was to save the world from AIG."
Starr is improperly seeking "a $40 billion windfall," Dintzer said. The bailout was "the largest package of assistance in human history," he said.
"This enormous benefit was a benefit that shareholders were not entitled to, they didn't earn, and apparently they don't appreciate," Dintzer said.
It would have been "a catastrophe" for AIG to go bankrupt, but "it would have been worse to allow the insurer to hold itself hostage" to seek better terms that other companies also would have demanded, he said.
Dintzer cited an AIG board adviser, who said: "Twenty percent of something is worth more than 100 percent of nothing."
He said the loan was legal and voluntarily accepted by AIG's board. He said Starr can't show that AIG shareholders were injured by the government's actions or that they would be better off if the government hadn't acted.
The 85 names on Starr's witness list include, among other top Wall Street regulators, Bernanke, the former Fed chairman; Paulson, President George W. Bush's treasury secretary; and Geithner, the head of the Federal Reserve Bank of New York in 2008 and later Obama's treasury secretary.
The complaint by Starr International, Greenberg's Swiss-based investment company, doesn't question the necessity of a rescue that began under Bush and continued under President Barack Obama. Rather, Starr claims AIG was singled out for punitive treatment that violated shareholders' constitutional rights to due process and just compensation for their property.
Boies, of Boies Schiller & Flexner LLP, said AIG was the only major company during the financial crisis required to surrender equity in exchange for federal loans.
He is arguing on behalf of AIG shareholders in a nonjury trial before U.S. Court of Federal Claims Judge Thomas Wheeler set for six weeks. The judge, a Bush appointee, rebuffed government bids to dismiss the 2011 suit and also criticized the U.S. for pressuring the AIG board to forgo joining the case.
The trial is expected to involve public testimony about private decision-making that led the New York Fed to take an 80 percent stake in AIG, beginning on Sept. 16, 2008, a day after the bankruptcy of Lehman Brothers Holdings Inc. The central bank's position was adjusted four times, eventually reaching 92 percent.
AIG returned to profitability, and repaid the assistance in 2012, leaving the government with a $22.7 billion profit. AIG, with a market capitalization of $32.6 billion the week before the bailout, fell to $12.8 billion in value the day before the government stepped in. It's now valued at $77.3 billion.
In March 2009, AIG reported a quarterly loss of more than $60 billion as mortgage-backed securities slumped. By 2012, the bailout included a $60 billion credit line from the Federal Reserve Bank of New York, a Treasury investment of as much as $69.8 billion and as much as $52.5 billion from the Fed to buy mortgage-linked assets once owned or backed by the insurer.
"There's certainly a reasonable likelihood that the company would have collapsed and the shares would be worthless" without a bailout, said John Echeverria, a professor at Vermont Law School, of South Royalton, Vt.
The case offers a chance at personal vindication for Greenberg, 89, who led AIG for almost 40 years before resigning in 2005 during an investigation into company accounting practices by Eliot Spitzer, then New York's attorney general. A lawsuit filed by Spitzer against Greenberg was narrowed by a judge and is set for trial in New York State Supreme Court in Manhattan in January.
"There's a huge point of principle that he's been pursuing for a long time," said David Skeel, a law professor at the University of Pennsylvania. "He feels like he was unfairly pushed out of AIG, he feels like the government unfairly intervened. Ultimately, what is driving him is this point of principle, it's vindication in his claim that he was unfairly treated."
Steve Aiello, a spokesman for Greenberg, declined to comment on the trial.
Business on 09/30/2014