Ex-AIG chief wins law­suit

But a fed­eral judge awards no dam­ages over the in­sur­ance com­pany’s bailout.

Los Angeles Times - - BUSINESS - By Jim Puz­zanghera jim.puz­zanghera @latimes.com Twit­ter: @JimPuz­zanghera

A fed­eral judge rules that reg­u­la­tors went too far in the 2008 bailout of the in­surer, but awards no dam­ages.

WASHINGTON — A fed­eral judge ruled that reg­u­la­tors went too far in tak­ing a huge stake in Amer­i­can In­ter­na­tional Group Inc. as part of its 2008 bailout, but he de­cided that dam­ages weren’t war­ranted for the gi­ant in­surer’s for­mer chief ex­ec­u­tive and other share­hold­ers.

Af­ter a high-pro­file trial that in­cluded tes­ti­mony by for­mer Fed­eral Re­serve Chair­man Ben S. Ber­nanke and two for­mer Trea­sury sec­re­taries, Judge Thomas C. Wheeler ul­ti­mately found that re­gard­less of the Fed’s over­step­ping its au­thor­ity, AIG would have gone bank­rupt with­out fed­eral aid and would have left in­vestors with noth­ing any­way.

Wheeler’s de­ci­sion, re­leased Mon­day, faulted the Fed for tak­ing a 79.9% stake in the com­pany in ex­change for an $85-bil­lion loan that helped keep the firm af loat dur­ing the fi­nan­cial cri­sis.

The loan — the first part of a com­plex bailout that ul­ti­mately to­taled $125 bil­lion — was “an illegal ex­ac­tion un­der the 5th Amend­ment,” which pro­hibits the gov­ern­ment from tak­ing pri­vate prop­erty “with­out just com­pen­sa­tion.”

“There is no law per­mit­ting the Fed­eral Re­serve to take over a com­pany and run its busi­ness in the com­mer­cial world as con­sid­er­a­tion for a loan,” wrote Wheeler, a judge on the U.S. Court of Fed­eral Claims.

De­spite his find­ings, Wheeler did not award any money to AIG’s for­mer long­time chief, Mau­rice R. Green­berg, or other share­hold­ers in the class-ac­tion suit. Green­berg had sought dam­ages of more than $40 bil­lion.

Although the Fed wasn’t per­mit­ted un­der law to take the own­er­ship stake, “the gov­ern­ment did not cause any eco­nomic loss to AIG’s share­hold­ers,” Wheeler said. He quoted a fi­nan­cial ad­vi­sor to AIG’s board dur­ing the fi­nan­cial cri­sis, who noted that “20% of some­thing [is] bet­ter than 100% of noth­ing.”

“The in­escapable con­clu­sion is that AIG would have filed for bank­ruptcy, most likely dur­ing the week of Septem­ber 15-19, 2008,” Wheeler wrote in his 75-page rul­ing. “In that event, the value of the share­hold­ers com­mon stock would have been zero.”

The Fed’s loan “sig­nif­i­cantly en­hanced the value of the AIG share­hold­ers’ stock,” Wheeler said.

The Fed said Mon­day that of­fi­cials be­lieved the cen­tral bank’s bailout was “le­gal, proper and ef­fec­tive” and “pre­vented losses to mil­lions of pol­i­cy­hold­ers, small busi­nesses, and Amer­i­can work­ers who would have been harmed by AIG’s col­lapse dur­ing the fi­nan­cial cri­sis.”

“The terms of the credit were ap­pro­pri­ately tough to pro­tect taxpayers from the risks the res­cue loan pre­sented when it was made,” the Fed said.

Green­berg, who built AIG into a fi­nan­cial pow­er­house, was ousted as the com­pany’s chief ex­ec­u­tive in 2005 af­ter an ac­count­ing scan­dal.

In 2011, Green­berg’s Starr In­ter­na­tional Co. in­sur­ance firm, which holds a large stake in AIG, sued the fed­eral gov­ern­ment on be­half of AIG share­hold­ers claim­ing that the bailout amounted to an illegal tak­ing of their prop­erty.

The gov­ern­ment even­tu­ally in­creased the amount of money it pledged to AIG to about $182 bil­lion and its own­er­ship stake to 92%. AIG later re­paid the $125 bil­lion it bor­rowed plus in­ter­est and div­i­dends, and the gov­ern­ment made gains on its stake as the com­pany’s stock price re­cov­ered. Taxpayers ended up with a net $22.7-bil­lion gain from the bailout.

An­drew Stolt­mann, a Chicago in­vestors’ lawyer spe­cial­iz­ing in se­cu­ri­ties law­suits, agreed with Wheeler’s de­ci­sion not to award any dam­ages.

“Had Green­berg been able to se­cure a re­cov­ery, it would have been a real mis­car­riage of jus­tice,” Stolt­mann said. “AIG ex­ec­u­tives and their reck­less con­duct were to blame for the losses, not any ac­tions taken by the fed­eral gov­ern­ment.”

Ex­perts and gov­ern­ment of­fi­cials have said the con­duct of AIG, a pow­er­house deeply en­twined in the world­wide fi­nan­cial sys­tem, was one of the ma­jor el­e­ments lead­ing to the global credit cri­sis then and deep­en­ing the Great Re­ces­sion.

But Wheeler said the gov­ern­ment “treated AIG much more harshly than other in­sti­tu­tions in need of fi­nan­cial as­sis­tance” and “the ev­i­dence sup­ports a con­clu­sion that AIG ac­tu­ally was less re­spon­si­ble for the cri­sis than other ma­jor in­sti­tu­tions.”

Mark Lennihan As­so­ci­ated Press

MAU­RICE GREEN­BERG said the bailout amounted to an illegal tak­ing of AIG share­hold­ers’ prop­erty.

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