U.S. Appeals court holds crisis bailout of AIG lawful

WASHINGTON >> A federal appeals court has upheld as lawful the government’s bailout of American International Group in the heat of the financial crisis. It overturned a lower-court decision favoring the insurance giant’s former CEO.

The ruling Tuesday by the U.S. Court of Appeals for the Federal Circuit said a company controlled by ex-AIG chief Maurice Greenberg didn’t have a legal right to pursue its claim against the government. Greenberg had alleged that the $85 billion bailout of the teetering AIG in September 2008 violated the Constitution’s Fifth Amendment by taking control of the company without “just compensation.”

The unusual case raised the issue of limits on the government’s power in responding to financial catastrophe. The new ruling handed a victory to the government.

The previous decision by a judge in the U.S. Court of Federal Claims validated Greenberg’s allegations in principle, though the judge rejected Greenberg’s demand for $40 billion in damages from the government for himself and other AIG shareholders.

Writing the new opinion for a three-judge panel of the appeals court, Chief Judge Sharon Prost said any claims against the government rightfully belong to AIG, not Greenberg’s company, Starr International. AIG “has exercised its business judgment and declined to prosecute this lawsuit,” Prost wrote. “The alleged injuries to Starr are merely incidental to injuries to AIG, and any remedy would go to AIG, not Starr.”

Starr did not show that it, rather than AIG, directly suffered harm from the taxpayer bailout, the judges said.

An eight-week trial in the fall of 2014 brought the rare spectacle of back-to-back courtroom testimony by three former leaders of the government’s bailout — then-Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and New York Fed President Timothy Geithner.