Bloomberg News

Greenberg’s $25 Billion AIG Bailout Claim Should Be Rejected, U.S. Says

March 02, 2012

The U.S. government said Maurice “Hank” Greenberg, the former American International Group Inc. (AIG) chief executive officer, should not be allowed in a court case to “rewrite” the insurer’s rescue agreement and make American taxpayers pay $25 billion more.

The U.S. Justice Department, in a filing yesterday in the U.S. Court of Federal Claims in Washington, said a lawsuit filed by Greenberg’s Starr International Co. seeking damages in that sum for the 2008 AIG takeover should be dismissed. The government said Starr lacks the authority to sue and has no claim.

“Starr demands that the court second guess AIG and rewrite the rescue agreement by making American taxpayers pay an additional $25 billion, based upon a market valuation of AIG after the rescue,” the U.S. said in its filing. “Although Starr may disagree with the terms to which AIG agreed, any burdens resulting from that agreement should be borne by AIG and its shareholders, not the public.”

Starr International 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.

AIG was added as a “nominal” defendant in the case, meaning the company would be bound by any judgment.

Alison Preece, a spokeswoman for the law firm representing Starr, declined to comment on the government’s filing.

AIG Common Stock

Starr claims that the U.S. taking of 562.9 million shares of AIG common stock was illegal. Starr alleges that while the U.S. got so-called fairness opinions from banks on exchanging two groups of preferred stock, it failed to get such an opinion in exchanging a block of preferred stock for 562.9 million shares “for virtually nothing,” according to the complaint.

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.

The claims 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 U.S. Constitution.

Liquidity Crisis

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. (LEHMQ) 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.

On Nov. 21 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.

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).

To contact the reporter on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net

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


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