NYT: AIG May Bite the Government Hand that Fed It

Tuesday, 08 Jan 2013 11:05 AM

By John Morgan

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American International Group, one of the biggest recipients of the taxpayer-funded Wall Street bailouts, is contemplating whether to join a lawsuit against the government on grounds the bailout terms violated shareholder rights.

The unfriendly move is on AIG’s board agenda after the company finally finished paying back its giant $182 billion bailout.

Some government officials are upset with the company for even considering whether to join the lawsuit, according to The New York Times.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

Maurice Greenberg, AIG’s former chief executive, whose insurance and investment firm is still a major investor in the company, brought the $25 billion shareholder lawsuit.

The Times noted sources in the case, who spoke on the condition of anonymity, said that without the bailout, AIG shareholders would have suffered more in bankruptcy.

The Federal Reserve Bank of New York, one of AIG's rescuers, said the insurer could have chosen bankruptcy instead of the bailout, which would have wiped out shareholders completely, according to Reuters.

"There is no merit to these allegations. AIG's board of directors had an alternative choice to borrowing from the Federal Reserve and that choice was bankruptcy. Bankruptcy would have left all AIG shareholders with worthless stock," a representative of the New York Fed said Tuesday, Reuters reported.

The company was on the brink of collapse when it received the 2008 bailout because of deteriorating mortgage securities that it had insured through credit-default swaps, according to The Times.

But the lawsuit claims the terms of the rescue — the government’s assumption of a 92 percent stake in the company, the high interest rates charged and the channeling of billions to the insurer’s Wall Street clients — violated the Fifth Amendment guarantees against taking private property for “public use without just compensation,” the newspaper reported.

The board of AIG will meet on Wednesday to consider whether to become a party to the suit. Its members owe a fiduciary duty to shareholders to consider whether to join the case, and Greenberg could challenge their decision if they abstain, The Times said. Also, if Greenberg’s suit is successful and AIG doesn’t join in, other shareholders could file lawsuits against the company.

Frank Partnoy, a former banker who is now a University of San Diego School of Law professor, said the board is wise is to be cautious from a corporate governance perspective.

“One the other hand, it’s a slap in the face to the taxpayer and the government.”

Greenberg contends the bailout extracted a “punitive” interest rate of more than 14 percent. The lawsuit claims the government used billions of dollars from AIG to settle credit-defaults the firm had with banks like Goldman Sachs. Thus the deal, according to the lawsuit, allowed the government to carry out a “backdoor bailout” of Wall Street, The Times reported.

The original lawsuit was dismissed in November by a federal judge. But the U.S. Court of Appeals for the Second Circuit agreed to review the case, and the U.S. Court of Federal Claims declined to dismiss the case and continues to await AIG’s decision.

Greenberg ran AIG for nearly four decades until resigning amid investigations into an accounting scandal in 2005, according to The Times.

The Wall Street Journal noted, ironically, that AIG this month launched a new advertising campaign that thanks the U.S. taxpayers for their support and notes that the endeavor earned the government a combined positive return of more than $22 billion.

An AIG spokesman told The Journal that the board "takes its fiduciary duties and business judgment responsibilities seriously."

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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