(Bloomberg) — In Maurice “Hank” Greenberg’s telling, the $182 billion taxpayer bailout that saved American International Group Inc. and perhaps all of Wall Street during the 2008 financial collapse was a government rip-off.
It trampled the rights of shareholders, denying them more favorable terms offered to banks and companies that foundered during the meltdown, according to Greenberg, who built AIG into the world’s biggest insurer before leaving in 2005.
Greenberg’s Starr International Co., AIG’s largest shareholder when the financial crisis struck, sued the government, calling its assumption of 80% of the insurer’s stock an unconstitutional “taking” of property that requires at least $25 billion in compensation.
A trial of his claims begins today in Washington, where David Boies, Greenberg’s famed litigator, will question the architects of the bailout, including Ben Bernanke, Henry Paulson and Timothy Geithner.
“I think they’re going to lose,” Marcel Kahan, a New York University law professor who specializes in corporate finance and governance, said of Greenberg and Boies. “I think they realize they’re going to lose. But you never know what’s going to happen.”
The complaint by Starr International, Greenberg’s Swiss- based investment company, doesn’t question the necessity of a rescue that began under Republican President George W. Bush and continued under Democrat 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.
While Greenberg faces long odds of winning, he could succeed in putting the bailout on trial, a potential payback for the mistreatment he claims in his suit, Kahan said.
“If you can depose Obama’s former Treasury secretary and high-level politicians, God knows what you will uncover that would be embarrassing for the Obama administration,” he said.
Boies, of Boies Schiller & Flexner LLP, will argue on behalf of AIG shareholders in a six-week, non-jury trial before U.S. Court of Federal Claims Judge Thomas Wheeler. 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 85 names on Starr’s witness list include, among other top Wall Street regulators, Bernanke, the former Federal Reserve chairman; Paulson, Bush’s Treasury secretary; and Geithner, the head of the Federal Reserve Bank of New York in 2008 and later Obama’s Treasury secretary. Some, like Bernanke, fought to avoid testifying.
They’re expected to revisit the closed-door decision-making that led the New York Fed to take an 80% 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%.
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 $77.8 billion.
It’s impossible for Starr to show the bailout caused any harm to AIG shareholders, given that the alternative was bankruptcy, the government contends.
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 up to $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, Vermont.
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.
The government “loaned billions of dollars to foreign and domestic institutions at interest rates that were a fraction of those charged to AIG,” Boies wrote in Starr’s complaint. AIG paid 8.5% annual interest plus the 3-month London interbank offered rate on money it drew from the bailout loan.
Likewise, the New York Fed guaranteed “hundreds of billions of dollars in loans to various institutions, including Citigroup Inc.,” without taking any ownership in those companies, Boies wrote.
That may be Starr’s strongest argument, Skeel said.
“The way the government did the transaction, by taking stock rather than making a loan to AIG, was borderline illegal,” Skeel said. “I think it could be defended, but the Fed’s emergency powers ordinarily require that they make loans, not that they buy the assets.”
The U.S. may argue, in turn, that “different companies present different risks to the economy,” said Echeverria, the Vermont Law School professor. By acting in a crisis, government officials were “entitled to considerable deference as to whether they made the best decision.”
The U.S. has pushed back hard, arguing in a court filing that Starr has built the case on “a misperceived entitlement” to government assistance.
“Starr contends that, because of AIG’s size” and the damage its bankruptcy likely would have caused the national economy, the New York Fed “had to make a rescue loan on the terms that Starr argues AIG should have received, no matter the policy implications or moral hazard or risk of loss to the taxpayers,” according to the government filing.
“Under Starr’s theory, the government was required not only to rescue AIG with better terms than the company could obtain from private parties in the marketplace, but also to confer an enormous windfall on the shareholders,” U.S. lawyers wrote.
Greenberg secured backing for the suit from his peers in finance, raising about 15% of the tens of millions of dollars in litigation costs from three Wall Street investors who would be entitled to a share of any damages, said a person familiar with the arrangement who didn’t want to be identified because it wasn’t public.
For Boies, 73, who represented the U.S. in its landmark 1999 Microsoft Corp. antitrust trial and Al Gore in presidential recount litigation of 2000 that ended with Bush taking office, the Starr case is part of a larger challenge to the bailout.
His firm also represents investors in Fannie Mae and Freddie Mac, the mortgage giants taken over by the U.S. The investors accuse the government of depriving them of the value of their shares when it changed the terms of the takeover in August 2012.
Wheeler, the judge who will decide Starr’s case, upheld AIG’s decision not to join the suit, while criticizing the government’s conduct in opposing the insurer’s participation.
The prospect of AIG joining with Greenberg drew rebukes from lawmakers including Democratic Senators Elizabeth Warren of Massachusetts and Robert Menendez of New Jersey, as well as Representative Elijah Cummings, a Maryland Democrat who said AIG suing the U.S. would be an insult to taxpayers who rescued the company.
In his June 2013 ruling, Wheeler said he was “troubled” that the Treasury Department’s lawyer “made threatening statements to AIG board members” as they fulfilled their legal obligation to weigh participating in the suit.
Wheeler said he was also bothered by “the low evaluation of Starr’s potential success on the merits,” presented to the AIG board by its lawyers. The judge said he didn’t understand “how anyone could have made a precise assessment of this fact- dependent case without knowing what all of the evidence ultimately will show.”
The case is Starr International Co. v. U.S., 11-cv-00779, U.S. Court of Federal Claims (Washington).