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Regulation and Compliance > Federal Regulation

Greenberg Response to Fed Answer

By Arthur D. Postal

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Lawyers for Maurice “Hank” Greenberg, former chairman and CEO of American International Group (AIG), argue in a court filing that the Federal Reserve Bank did not have unlimited powers when it moved to aid AIG in late 2008 and that some of its actions breached its duty to AIG shareholders.

The filing was in response to a filing by the Federal Reserve Bank of New York (FRBNY) in April, a lawsuit Greenberg, individually and as a shareholder of what was then an AIG subsidiary, Starr International, filed last November against the Fed.

The suit was filed in Federal District Court in Manhattan.

Greenberg has also filed suit in the Federal Court of Claims in Washington against the Treasury Department on similar grounds.

In the latest response, filed Friday, lawyers for Greenberg contend that the FRBNY is wrong in claiming that it has immunity from claims incurred in all of its actions regarding AIG.

“In sum, there is no basis for dismissing this case at this preliminary stage, and FRBNY’s motion should be denied,” the Greenberg response said.

The suit contends the FRBNY breached its fiduciary duty to AIG shareholders “when it caused AIG to take actions which helped third parties and furthered FRBNY’s goals unrelated to FRBNY’s core statutory purpose: lending.”

The answer by Greenberg’s lawyers says that the FRBNY is wrong in contending that because it lent and exercised control as part of a rescue operation, “it was freed of any duty whatsoever to the loan-receiving entity or its common stock shareholders.”

The answer by Greenberg lawyers says that the FRBNY contends that all fiduciary duties are preempted, and appears to contend that it is also subject to no constitutional constraints.

 “FRBNY is not correct, and indeed its argument fundamentally misapprehends the nature of the claims against it,” the Greenberg answer said.

In its April answer, the Fed said the complaint should be dismissed without further imposition of burdens on the Federal Reserve Bank of New York, “and, ultimately, taxpayers.”

The Fed response added that, “Although the complaint downplays AIG’s plight as ‘a liquidity problem, not a solvency problem’, the ‘liquidity problem’ was gargantuan and threatened AIG with bankruptcy.”

Greenberg took back Starr, a Switzerland-based firm, as part of an earlier settlement of claims he made against the federal government. Greenberg was ousted from AIG by directors in 2005, and at that time initiated litigation against AIG.

AIG in September 2008 turned over 79.9% of its stock to the Fed in return for the cash needed to prevent an insolvency filing. The Fed, plus the U.S. Treasury, loaned AIG at one point up to $300 billion in return for the stock as well as direct interest in AIG subsidiaries, some of which have since been sold in whole or in part.

Some of these funds were granted through “facilities” established by the Fed that were collateralized by securities held by AIG subsidiaries.

In the suit, filed in November and amended in February, Greenberg, on behalf of himself, other AIG shareholders, and Starr, argued that the Fed’s sole authority was to lend money to AIG.

The Fed also provided other, non-cash aid to AIG. AIG has over the past 18 months gradually paid down the Fed’s investment in AIG. At this time, the federal interest in AIG is primarily its approximately 60 percent share of its common stock.

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