Bloomberg News

Greenberg’s AIG Bailout Suits Pursue Unique Theories

December 06, 2011

(Updates with share price in last paragraph.)

Dec. 1 (Bloomberg) -- Maurice R. Greenberg, the former American International Group Inc. chief executive officer, seeks to break new ground in lawsuits challenging the U.S. takeover of the insurer in a bailout that reached $182 billion.

Greenberg’s Starr International Co. sued the government Nov. 21, calling the public assumption of 80 percent of stock in the insurer in 2008 an unconstitutional “taking” of property that requires $25 billion in compensation.

Starr also sued the Federal Reserve Bank of New York, saying it breached its duty to AIG shareholders by loaning $85 billion at 14.5 percent while offering better terms to banks in a “backdoor bailout.” AIG almost collapsed after bets tied to the housing market soured, and the bailout was revised at least four times before reaching $182 billion.

Both complaints were filed by attorney David Boies, who represented the U.S. in its Microsoft Inc. 1999 antitrust trial and Al Gore in the Florida presidential recount litigation in 2000.

“Any time David Boies is asking for $25 billion, I would say this is not a normal case,” said Robert H. Thomas of the Honolulu firm Damon Key Leong Kupchak Hastert.

“He takes cutting edge cases in unexplored areas of law,” said Thomas, who specializes in land-use and eminent domain. “It’s audacious. As someone who represents plaintiffs in these kinds of cases, I’d say more power to him. But it’s a stretch.”

Boies convinced a judge that Microsoft Corp. was a monopolist and successfully defended Starr against an AIG claim in 2009 that it looted the insurer of $4.3 billion in stock. He also worked for National Basketball Association players in labor talks that just concluded.

Boies Response

Boies didn’t respond to requests for comment on his chances of success in the Starr cases.

He sued the Federal Reserve in U.S. District Court in New York, and the takings case is in the U.S. Court of Federal Claims in Washington. That court handles cases against the federal government for money, including claims that the U.S. took private property for public use without just compensation in violation of the Fifth Amendment to the Constitution.

Most of those cases involve the loss of property value through regulation, Thomas said.

Starr, AIG’s largest shareholder at the time of the bailout, claims that in the midst of the financial crisis in September 2008, the U.S. took 80 percent of AIG’s equity while violating the constitutional rights of shareholders to due process and equal protection of the law.

Bailout’s Flaws

While the bailout was “ostensibly designed to protect the United States economy and rescue the country’s financial system,” Starr claims, “the ends could not and did not justify the unlawful means employed by the government to achieve that goal.”

Greenberg led AIG for almost four decades though 2005, resigning amid an investigation by New York Attorney General Eliot Spitzer into accounting practices. Greenberg is also chairman and CEO of C.V. Starr & Co.

Before recovering compensation for a taking, Starr must accept the government’s underlying premise for the action and not challenge its validity, according to attorney Jerry Stouck of Greenberg Traurig LLP in Washington.

“It’s assumed that if they took your property, they did it for a good reason,” Stouck said. “The issue is whether the 80 percent equity in AIG was taken from its owner under circumstances that require the government to pay for that stake.”

Power to Take

Takings cases have produced mixed results at the Supreme Court in recent years. In 1992, it ruled in Lucas v. South Carolina Coastal Council that a landowner is entitled to compensation when regulators bar all development on a parcel.

In 2005, the court gave local governments broad power to take over private property to make way for shopping malls, office parks and sports stadiums.

Government agencies can constitutionally take property as part of an economic development plan and transfer it to another party, as long as the landowner is compensated, the court ruled in a case involving development in New London, Connecticut.

Starr argues that AIG was caught in a liquidity crisis hastened by the Fed’s denying the insurer access to lending through its so-called discount window.

The central bank struck the AIG equity deal a day after the Lehman Brothers Holdings Inc. bankruptcy on Sept. 15, 2008. Starr claims the U.S. could have lent money without demanding equity, as it did with foreign banks and other lenders.

Treasury Official

“It is important to remember that the government provided assistance to AIG -- and stopped it from collapsing -- in order to prevent a meltdown of the entire global financial system,” said Tim Massad, assistant secretary for financial stability at the U.S. Treasury. “Our actions were necessary, legal and constitutional. We are reviewing the lawsuit and expect to defend our actions vigorously.”

Jack Gutt, a spokesman for the New York Fed, said the allegations have no merit.

“AIG’s board of directors had an alternative choice to borrowing from the Federal Reserve, and that choice was bankruptcy,” Gutt said. “Bankruptcy would have left all AIG shareholders with worthless stock. The Federal Reserve’s actions with regard to AIG helped to restore financial stability in the United States during a period of intense volatility and vulnerability in the U.S. economy.”

Starr must show that it suffered an injury that requires compensation, said Vermont Law School professor John Echeverria.

Assets’ Value

“That depends on a showing that the assets were worth X before the government acted and X minus Y after the government acted,” Echeverria said. “The suit is on its face unappealing and unattractive. The court will look with great skepticism on a claim seeking billions of dollars in taxpayer funds.”

Regulators have “tremendous discretion” to act, said attorney Thomas M. Buchanan of Winston & Strawn LLP in Washington.

“I don’t think I’ve seen any takings cases that have succeeded in a financial crisis,” Buchanan said. “This is obviously a pretty novel theory.”

Winning a regulatory takings case is very difficult, said Robert H. Freilich, an attorney at Freilich & Popowitz in Los Angeles. Starr must show that a regulatory taking meant that it lost “all or substantially all use and value of the property from the imposition of a regulation,” Freilich said.

“AIG entered into a voluntary contractual relationship and was not the subject of Federal Reserve or Treasury regulatory power,” he said. “How could the shareholders have been denied all use and value of their property when the government itself had value in its 80 percent stake?”

Foreseeing Failure

Professor Richard Epstein of New York University School of Law assessed the lawsuit’s prospects more bluntly.

“It’s going to lose,” Epstein said. “The basic rule is when you sue the Federal Reserve acting in its regulatory capacity, even for outrageous things, they win. It’s an inescapable reality that, in effect, the government holds all the high cards in litigation.”

AIG fell 31 cents, 1.3 percent, to $23 in trading in New York today.

The federal claims case is Starr International Co. v. U.S., 1:11-cv-00779, U.S. Court of Federal Claims (Washington). The Federal Reserve case is Starr International Co. v. Federal Reserve Bank of New York, 1:11-cv-08422, U.S. District Court, Southern District of New York (Manhattan).

--With assistance from Tom Schoenberg in Washington. Editors: Charles Carter, Michael Hytha

To contact the reporter on this story: David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.


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