The judge presiding over a $25 billion lawsuit against the U.S. filed by Maurice “Hank” Greenberg, the former American International Group Inc. (AIG:US) chief executive officer, said he’s “hesitant” to throw out the case without more information on the company’s 2008 bailout.
U.S. Claims Judge Thomas Wheeler made the comment today in Washington during a hearing on a government request to dismiss the case filed by Greenberg’s Starr International Co. Wheeler said he didn’t know why Starr International was allegedly barred from attending a 2008 U.S.-brokered meeting with a consortium of banks in which private financing for AIG was discussed.
“I’m perhaps a little hesitant to throw them out without knowing what happened,” Wheeler said near the end of the three- hour hearing. “We don’t know first-hand what transpired there. Aren’t they allowed to do some discovery to find out what went on?”
Wheeler said he’d have a decision “in the near future.”
Starr International sued the government on Nov. 21, calling the public assumption of 80 percent of AIG stock in September 2008 a violation of the constitutional rights of shareholders to due process and equal protection of the law.
Starr International, AIG’s largest shareholder at the time of the bailout, 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.
AIG was added as a “nominal ” defendant in the case, meaning the company would be bound by any judgment. AIG’s lawyer, Joseph Allerhand of Weil, Gotshal & Manges LLP in New York, told Wheeler that the insurer would “weigh in” once the judge decides whether the case will move forward.
Lawyers for Starr International Co. argued today that the company has the right to seek compensation for itself and all AIG shareholders for what it alleges was an illegal taking of property by the government during the 2008 financial crisis.
“This was a taking of billions and billions of dollars of AIG interest,” David Boies, a lawyer for Starr International, said. “The constitution says you have the right to recover what was taken and that’s exactly the situation here.”
Boies said the government paid $500,000 for a stake in the company that was worth $25 billion.
According to the complaint, the day Lehman Brothers Holdings Inc. filed for bankruptcy on Sept. 15, 2008, the government brokered talks among several banks. The meeting was aimed at arranging private financing for a loan to address AIG’s liquidity problems.
Starr International officials asked to attend the meeting and were denied, according to its complaint.
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.
Boies said once the government gained control of the insurer, it used about $32.5 billion in AIG assets to offer so- called “backdoor bailouts” to financial institutions.
“What you have here is the takeover of control, the takeover of equity and then the use of company assets to fund a public interest,” said Boies of Boies, Schiller & Flexner LLP.
The Justice Department said in court papers that AIG agreed to the bailout and Starr International shouldn’t be allowed in a court case to “rewrite” the insurer’s rescue agreement and make American taxpayers pay $25 billion more.
“AIG didn’t need to deal with the government if it didn’t want to,” Brian Simkin, a lawyer for the Justice Department, said today. “There’s no clear showing the government acted contrary to the law.”
The government “saved it from bankruptcy of its own making,” he said.
Simkin said the transactions that Starr International calls “backdoor bailouts” were an effort to take bad assets off of AIG’s books and put them on the Federal Reserve’s books.
“The idea of a backdoor bailout is ludicrous,” he said. “It was designed to rescue AIG.”
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 interest while offering better terms to banks. AIG almost collapsed after bets tied to the housing market soured, and the bailout was revised at least four times before reaching $182 billion.
John Todor, a Justice Department lawyer, said the government has been selling AIG stock and its interest in the company has dropped to 61 percent interest.
The case is Starr International Co. v. U.S., 1:11-cv-00779, U.S. Court of Federal Claims (Washington).
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