AIG bailout trial judge questions U.S. over taking equity

(Bloomberg) — The judge weighing a $25 billion investor lawsuit over the 2008 bailout of American International Group Inc. challenged U.S. arguments that assuming control of the insurer didn’t amount to taking shareholder property.

Maurice “Hank” Greenberg’s Starr International Co., AIG’s largest shareholder before the bailout, contends the terms of the initial $85 billion rescue loan illegally gave the government an 80 percent equity stake in the insurer.

U.S. Court of Federal Claims Judge Thomas Wheeler, who sided with Starr several times during an eight-week trial last year, questioned a government lawyer’s contention during closing arguments Wednesday that there wasn’t an illegal taking of shareholder property when the bailout began on Sept. 16, 2008.

“There’s no question in anybody’s mind that there had been a change in ownership of AIG corporation,” Wheeler said. “The government is in there running the show. There’s no doubt about that.”

“How can it be that there wasn’t some sort of illegal exaction or taking for that to happen?” Wheeler asked Kenneth Dintzer, a Justice Department lawyer. It was one of several exchanges in which the judge balked at government explanations of its legal authority to demand equity for the bailout.

Obligated to taxpayers

Dintzer said the government was obligated to taxpayers to oversee the loan and “see where the money is going. It came in to monitor and help.”

Dintzer said the AIG board consented to the government’s conditions as a preferable alternative to bankruptcy.

“Starr’s claims have a lot of amnesia about them,” Dintzer said. “They’ve forgotten the risks and expense the taxpayers undertook to rescue AIG.”

Dintzer’s comments came near the end of the last day of the trial, capping years of skirmishing over a 2011 case filed in a court that specializes in claims against the federal government.

Wheeler promised a ruling “in the relatively near future.” To accommodate a large crowd, closing arguments were held in a courtroom of the U.S. Court of Appeals for the Federal Circuit, a larger space than Wheeler’s regular courtroom and the likely next stop for the case following his decision.

The 89-year-old Greenberg was among the spectators. He was listed as a possible witness but wasn’t called and didn’t attend the witness portion of the trial, which began in late September and ended just before Thanksgiving. He declined to comment on the case as he exited the courtroom.

Shares dilution

Though the AIG bailout ballooned to $182 billion, the insurer eventually returned to profitability and repaid the assistance in 2012, leaving the government with a $22.7 billion profit. Starr, the Switzerland-based holding company run by Greenberg, seeks compensation for about 275,000 AIG investors who claim they were harmed by the dilution of their shares as a result of the government’s equity stake. AIG isn’t a party in the case.

Wheeler wondered aloud if profit motivated the government. One plausible view of the case is that that the government took the shares and “then pocketed the revenue” from selling them, Wheeler said, smiling at Dintzer. “I mean, come on.”

Dintzer told Wheeler that there wasn’t any testimony in the trial that a rescue loan would be made without a surrender of equity. Without the loan, AIG would have gone bankrupt and the shares would be worth nothing, he said.

Government’s profit

In any case, the government’s profit was irrelevant because the issue for the court is the loan’s effect on shareholders, and it benefited them, Dintzer said.

Greenberg’s lawyer, David Boies, asked Wheeler to find the government acted illegally in two ways: by demanding the equity in exchange for the bailout loan, and by failing to pay just compensation to stockholders for the shares taken when they increased in value after the rescue was announced. Starr needs to prevail on only one of those claims to win its case.

Boies told Wheeler that AIG was “demonized” by the government and given much harsher terms than investment banks like Morgan Stanley. Regulators needed “somebody to be a political scapegoat if they were going to get the two presidential candidates, Mr. Obama and Mr. McCain, to support” the TARP emergency financial assistance legislation, Boies said.

The U.S. authorized emergency loans to hundreds of companies for 75 years and “never once, except in the case of AIG, did they demand equity,” he said. That’s because it lacked authority from Congress, Boies argued.

The case is Starr International Co. v. U.S., 11-cv-00779, U.S. Court of Federal Claims (Washington).