American International Group (AIG) has agreed to settle for $970 million a lawsuit which accused the company of misleading investors about its financial condition in the mid-2000s, a crisis which led to a takeover of the company by the Federal Reserve in order to save it. The settlement was disclosed through its quarterly earnings securities filing to the Securities and Exchange Commission Monday.
If approved by the U.S. Federal District Court in Manhattan, the total settlement amount will be among the largest recoveries ever achieved in a securities fraud class action stemming from the 2008 financial crisis, according to lawyers for Barrack Rodos & Bacine, lead plaintiff in the case. The firm’s lawyer said it would release claims of the members of the putative class, which consists of all persons and funds that purchased publicly issued common stock, corporate units, bonds, subordinated debentures and notes of AIG from March 16, 2006 through September 16, 2008, and were injured thereby.
The settlement was another important step in separating AIG from its troubled past. The Federal Reserve, using its extraordinary powers, agreed to acquire 79.9 percent of the company on Sept. 16, 2008 in return for $85 billion in cash needed to answer a margin call from owners of troubled mortgage-backed securities that an AIG unit had insured through so-called credit default swaps (CDS). The CDS protected purchasers of MBS of various grades whose value was declining as a housing boom in the U.S. turned into a housing bust.
It turned out that the unit, AIG Financial Products, had sold $2.77 trillion of these CDS. It had also used the prime grade securities serving as reserves of its 13 life insurance subsidiaries to purchase an estimated $70 billion of MBS of various grades.
Most of AIG’s liabilities were held off-balance sheet. The Fed provided more than $300 billion in cash or through creation with AIG of two “facilities” used to provide the cash needed to wind down the CDS liability. It also provided the government’s credit to the troubled company.
A study by an outside auditing group and released in October 2010 by the Pennsylvania Insurance Department showed that AIG had cross-collateralized all of its life and property and casualty insurance companies in order to secure the AAA credit rating used to sell the CDS.