(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.